Rob Moulton of Ashursts speaks to Seonaid Mackenzie on the Remuneration Issues for FCA and PRA firms

Remuneration Issues for FCA and PRA firms

To jog your memory, in July 2014 the PRA and FCA (the Regulators) published a joint consultation paper on ‘Strengthening the alignment of risk and reward: new remuneration rules (PRA CP15/14/ FCA CP14/14)’. The consultation paper contained key proposals to amend the rules relating to deferral and claw back as well as the rules on remuneration of non-executive directors and bonus provisions for bailed-out banks.Now, almost a year after the consultation was originally published, the Regulators have produced a policy statement (PRA PS12/15/ FCA PS15/16) which sets out their final approach to these issues.
It is no surprise that there has been considerable delay in the production of these final rules considering the on-going debate both at national and European level on the issue of bankers’ pay. In Autumn last year we had the withdrawal of the UK’s challenge to the European bankers’ bonus cap in the European Court of Justice. Earlier this year we also had the EBA’s consultation on guidelines for sound remuneration policies which proposes to remove the principle of proportionality for remuneration rules in European member states.
It is worth noting in that context that, to accompany the policy statement, the Regulators have republished their respective guidance and supervisory statements on the principle of proportionality. What is striking is that there is no mention whatever of the political disagreement between the UK and the EBA on the subject – still less any substantive amendment to the existing UK approach. In effect, the UK regulators seem to be confirming their legal and policy position in advance of the EU debate later this year and next.
The policy statement sets out the Regulators’ final position on the remuneration rules. Unsurprisingly, there is very little difference between what was proposed last July and the final rules. The main change relates to the position on deferral where the original proposals have been relaxed a little in their application to more junior staff.
The new rules on clawback and deferral will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016.  The rest of the requirements will apply from 1 July 2015.
A summary of the main points is set out below:

Deferral lengths

Currently, at least 40 per cent of bonus awards for material risk takers (MRTs) or 60 per cent in the case of directors or high earners, must be deferred for at least three to five years with awards vesting no faster than on a pro-rata basis.  In their original consultation, the Regulators proposed to replace this with two extended periods of deferral:

  • a deferral period for Senior Managers, as defined under the new Senior Managers’ Regime (SMR), of no less than seven years, with vesting no faster than on a pro rata basis from the third anniversary of the award; and
  • a deferral period for all other MRTs of five years with pro-rata vesting from the first anniversary of the award.

These periods exceed the minimum requirements under the Capital Requirements Directive but the Regulators take the view that the longer deferral periods for certain categories of staff are justified by the need to improve the alignment of risk and reward. They are aware of the argument that staff may discount the value of awards subject to extended deferral and that this could lead to higher levels of fixed pay but say that this argument needs to be balanced against the need to extend risk horizons; any further increase in fixed pay would not be welcomed.

Deferral scope

Respondents to the July consultation said that the Regulators’ proposals on the scope of deferral proposals failed to take into account the breadth of the MRT population which had increased this year due to the application of the EBA’s regulatory technical standards (RTS) on the identification of MRTs.  The Regulators agreed that it would be disproportionate to apply five-year deferral to all MRTs below Senior Manager level as originally proposed (particularly those in junior roles with limited authority to commit the firm to risk) although the PRA maintains that the five-year deferral is appropriate for MRTs with senior, managerial or supervisory roles.
To read the article in full, along with the deferral requirements for awards of variable remuneration that apply, please click the file below.
 
FCA-and-PRA-final-rules-on-remuneration-in-financial-services-firms

Ashurst Contact Details

Robert Moulton

Partner, Co. Head of the Financial Regulation Practice

T: +44 (0)20 7859 1029

E: rob.moulton@ashurst.com

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