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Policy statements and final rules on remuneration

  • United Kingdom
  • Employment law
  • Financial institutions

15-05-2017

The PRA and the FCA have published policy statements and a supervisory statement on remuneration setting out final rules on how firms regulated by them should comply with remuneration requirements.

PRA supervisory statement SS2/17

Supervisory statement SS2/17 replaces earlier remuneration policy documents and letters to firms and should be read together with the rules set out in the Remuneration Part of the PRA rulebook. It applies to all firms regulated by the PRA which fall within the scope of the Remuneration Part.

SS2/17 was published together with policy statement PS7/17 which provides feedback to consultation paper CP33/16 on remuneration principles.

The PRA and FCA (see below) have complied with the European Banking Authority (EBA) final guidelines on remuneration except for the provision that the limit on awarding variable remuneration to 100% of fixed remuneration (or 200% with shareholder approval) – the bonus cap – must be applied to all firms subject to the Capital Requirements Directive (CRD). The EBA guidelines (effective from 1 January 2017) apply for the performance year 2017 onwards.

Level one and two firms must continue to apply the bonus cap. Both the PRA and the FCA require level three firms to set an appropriate ratio between fixed and variable remuneration. All other aspects of the EBA guidelines must be complied with.

SS2/17 sets out expectations of firms in relation to:

  • Proportionality
  • Material risk takers
  • Application of malus and clawback to variable remuneration
  • Governing body/ remuneration committees
  • Risk management and control functions
  • Remuneration and capital
  • Risk adjustment (including long-term incentive plans ‘LTIPs’)
  • Personal investment strategies
  • Remuneration structures (including guaranteed variable remuneration, buy outs and retention awards)
  • Deferral
  • Breaches of the remuneration rules

Key changes arising from consultation are set out below.

Proportionality

The PRA has clarified that it may be appropriate for a level three firm to disapply the rules on buy-outs. SS2/17 therefore provides that level three firms may be able to disapply rules pertaining to:

  • Retained shares or other instruments (Remuneration 15.15)
  • Deferral (15.17)
  • Performance adjustment (15.20-15.23) including clawback
  • Buy-outs (15A)

The PRA has also made clear that Rule 15A (buy-outs) applies to all material risk takers, including where an individual’s variable remuneration is no more than 33% of total remuneration and total remuneration is no more than £500,000.

Material risk takers (MRTs)

The PRA has clarified that where an individual has been a MRT for three months or less and is due to receive or has received an exceptional or irregular payment in relation to their MRT appointment the guidance in relation to part-year MRTs for more than three month applies (paragraph 3.11 of SS2/17). This provides that it may be appropriate to apply the rules on guaranteed variable remuneration, retained shares/ other instruments, deferral and performance adjustment to only a proportion of the individual’s variable remuneration.

The PRA has also clarified that in the case of group MRTs outside the UK who do not have responsibilities in relation to the UK-regulated entity the circumstances should be considered by the PRA and the FCA on a case-by-case basis.

Guaranteed variable remuneration

The PRA has clarified that all guaranteed variable remuneration (including ‘lost opportunity’ awards) continue to be subject to the general rules for variable remuneration including deferral, malus and clawback. These awards should also be included in the variable component of the fixed to variable ratio for the relevant performance period.

Read the PRA supervisory statement SS2/17.

FCA policy statement PS17/10

The FCA has published its final rules and guidance on remuneration policies and practices in PS17/10 in response to consultation paper CP16/28. Guidance on remuneration and proportionality has been simplified and new non-Handbook guidance addressing FAQs on implementation of the EBA guidelines is included. The policy statement affects all firms that fall within the scope of CRD IV who must comply with the FCA Remuneration Code under SYSC 19A and 19D.

As stated above, the EBA guidelines came into force on 1 January 2017 and firms should ensure they comply with the guidelines and FCA rules and guidance for the 2017 performance year onwards.

Changes or clarification arising from feedback from the consultation are set out below.

Assessing post-grant performance of LTIPs

The FCA has clarified that under SYSC 19A and 19D firms must ensure that all variable remuneration is based on an assessment of financial and non-financial performance of the individual, business unit and the firm. It expects to see individual performance considered both at the point of granting the award, and in the period prior to vesting, irrespective of whether the future performance measures are linked to firm level or division targets and measures.

Proportionality guidance

One respondent to consultation raised a concern that firms not subject to the bonus cap would potentially have a commercial advantage in being more able to attract and recruit skilled employees. The FCA notes that together with the PRA it has taken a proportionate approach to applying the bonus cap in order to recognise the different incentives and consequences for risk-taking across CRD-regulated firms. The FCA considers that it is proportionate to continue to allow smaller and non-complex firms (level three firms) to disapply the bonus cap where this is appropriate and justified.

Frequently asked questions

The FCA’s FAQs constitute general guidance which has effect from 3 May 2017. It should be read in conjunction with the FCA Handbook and other general guidance documents (in particular, general guidance on the application of ex-post risk adjustment to variable remuneration). The FAQs also supersede any previous FAQs.

The FAQs provide practical guidance to firms to understand how the EBA guidelines apply to them and also clarifies aspects of the FCA’s Remuneration Code. Firms should note that the guidance does not provide a complete summary of the FCA’s existing remuneration rules and guidance or to the EBA guidelines.

The FAQs cover the following topics:

MRTs – who needs to be identified as a MRT; what is the identification process; who can be excluded

  • Governance – how to approach the setting up of remuneration committees in firms that are part of a group
  • Groups – how the pay out process rules and bonus cap apply to non-CRD entities within the UK consolidation group; BIPRU firms and the application of SYSC 19A/19D; application of BIPRU remuneration principles proportionality rule to a level 3 BIPRU firm that is part of a UK consolidation group with a level 1 CRD IV firm
  • Proportionality – circumstances where firms may be able to disapply certain aspects of the Remuneration Code
  • Variable remuneration – how individual performance in a LTIP award can be measured; the split of cash and instruments in upfront and deferred components of variable remuneration; how bonus pools can include ex ante adjustments

General guidance on proportionality is also included.

Read PS17/10.

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