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Financial Services Reward

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Quarterly Update - September 2022

We are pleased to share our summary of key reward regulatory developments impacting firms in the financial services sector in recent months. Our update covers the following:

  • The Financial Conduct Authority’s (FCA) new Consumer Duty rules;
  • The Prudential Regulation Authority (PRA) Consultation Paper on deferral arrangements for Material Risk Takers (MRTs) seeking senior public sector appointments;
  • The Financial Reporting Council (FRC) position paper on restoring trust in audit and corporate governance;
  • The FCA’s annual letter to Remuneration Committee Chairs;
  • Potential developments in FS Reward: the PRA’s Discussion Paper on its future approach to policy and new speculation over the banking sector bonus cap;
  • The European Banking Authority’s (EBA) final guidelines on remuneration and gender pay gap benchmarking under the Capital Requirements Directive (CRD V) and the Investment Firm Directive (IFD);
  • The EBA’s final guidelines on high earner data collection under CRD V and IFD; and
  • The Basel Committee on Banking Supervision’s (BCBS) final principles for the effective management and supervision of climate-related financial risk.

You can read our quarterly summary here.


Key considerations for firms in relation to the lifting of the bonus cap - September 2022

Earlier this morning, during the Mini Budget, the Chancellor announced that the Government is planning on reforming the UK financial services sector remuneration rules. One of the main proposals is the removal of the bonus cap which applies to staff identified as Material Risk Takers (MRTs) under the Capital Requirements Directive (CRD V).

This update focusses on some of the key considerations for firms and Remuneration Committees if the bonus cap were to be amended or removed.

You can read our update here.


Financial Conduct Authority (FCA) letter to Remuneration Committee Chairs

On 2 August 2022, the FCA released its annual letter to the Remuneration Committee Chairs of proportionality Level 1 banks, building societies and PRA-designated investment firms. The letter outlines the FCA’s views and expectations on key topics for Remuneration Committees to consider as firms determine their year-end remuneration outcomes over the coming months. While addressed to Level 1 firms, the FCA publishes this letter on its website so that other Financial Services firms can see its supervisory priorities.

The key topics include a focus on culture and accountability and the new FCA Consumer Duty, as well as the rising cost of living, operational resilience, Environmental, Social and Governance (ESG) considerations and Diversity and Inclusion (D&I).

Overview of key areas

  • In relation to culture and accountability, the FCA reminds firms that, where there is evidence of regulatory failings, there should be appropriate, timely and transparent adjustments to remuneration, including that of Senior Managers. The FCA notes that “where appropriate” it may follow-up with the firm to request evidence for this.
  • The FCA highlights its recent publication of rules and regulatory guidance around a new Consumer Duty, which is intended to set higher and clearer expectations for the standard of care and customer service that firms should give to consumers at each stage of the product cycle. The FCA notes that firms’ remuneration policies should be designed to support the expectations set by the new Consumer Duty when it comes into effect from July 2023.
  • With the rising cost of living in the UK, the FCA has also highlighted the need for Remuneration Committee Chairs to be mindful of this when reviewing workforce remuneration, as well as to consider it from a risk perspective (as both a current and future risk) when designing and reviewing remuneration practices and policies.
  • Noting the importance of operational resilience for firms more broadly, the FCA makes clear that, in the event of service disruptions, data breaches or other interruptions to a firm’s operations, it expects firms to respond appropriately, including in the making of remuneration adjustments where appropriate.
  • The FCA highlights ESG as a continuing area of regulatory focus, with firms expected to consider whether incentives for senior leadership and other Material Risk Takers are aligned with wider ESG risks. The FCA also expects firms to consider whether linking progress against ESG commitments (from both a short-term and long-term perspective) to a “measurable proportion of pay” could be effective in encouraging individuals to take accountability for change.
  • The FCA references the Consultation Paper on D&I that is expected to be published later this year (following the publication of the Discussion Paper in July 2021), which will consult on a package of measures to promote D&I within the Financial Services sector. Within this consultation, it is expected that there will be proposals to update the responsibilities of the Remuneration Committee to reflect the importance that the UK regulators attribute to the Remuneration Committee in establishing the right conditions for a healthy firm culture.

Submission of Remuneration Policy Statement (RPS) by Level 1 firms

In addition to highlighting these key themes, the FCA has also specifically requested that Level 1 firms, when submitting their RPS, also provide an explanation of how the firm will take into account the impact of the current economic environment on bonus pools and individual outcomes. Level 1 firms are also now asked to provide details of how the firm’s ESG commitments, where these exist, are linked to the firm’s remuneration policy, including any metrics and targets.

A link to the full letter can be found here. Firms should also note that the FCA has updated its main Remuneration webpage content to align with its focus on culture.

 

PRA Policy Statement on Material Risk Taker identification

Overview: On 17 December 2021, the Prudential Regulation Authority (PRA) published its Policy Statement on the amendments to the PRA’s remuneration rules and regulatory guidance relating to Material Risk Taker (MRT) identification.

As proposed by the PRA in its Consultation Paper in September 2021, the amendments incorporate into the Remuneration Part of the PRA Rulebook the provisions relating to MRT identification set out in the Regulatory Technical Standards (RTS) on MRT identification under CRD V which were published in the EU’s Official Journal on 9 June 2021, as well as making corresponding changes to the PRA’s Supervisory Statement on remuneration (SS2/17).

The PRA is also updating the Certification Part of the PRA Rulebook to ensure alignment with the amended remuneration rules.

Firms in scope: Banks, building societies and PRA-designated investment firms, including third country branches.

Timing: The amended remuneration rules and updated guidance apply in relation to a firm’s first performance year starting after 30 December 2021. The changes to the Certification Part will come into effect on 1 March 2022.

Key provisions to note:

The provisions of the RTS on MRT identification under CRD V (as published in the Official Journal in June 2021) have been incorporated directly into the Remuneration Part of the PRA Rulebook, replacing the previous cross-references to the draft RTS on MRT identification which were published by the European Banking Authority (EBA) in June 2020.

The amended remuneration rules now set out both the qualitative and quantitative criteria for identifying MRTs, as well as incorporating specific definitions relating to MRT identification (for example, regarding “business unit” and “core business line”). The provisions of the RTS relating to, for example, how remuneration should be calculated and the factors that firms should take into account for the purposes of determining whether an individual has a significant impact on the risk profile of a Material Business Unit have also been incorporated into the updated rules.

The PRA’s Supervisory Statement on remuneration has been updated to reflect the changes to the rules above, as well as to provide further detail on the process for firms to follow in relation to the exclusion of individuals as MRTs.

As proposed in its Consultation Paper, the PRA has set specific GBP thresholds for the purposes of applying the quantitative MRT criteria. In its Policy Statement, the PRA has confirmed that it does not intend to reassess these thresholds each year.

The PRA has set the €750,000 total remuneration threshold (at or above which firms are required to obtain approval for the exclusion of individuals) at £660,000 and the €1 million threshold (where firms need to provide additional explanatory reasoning for proposing to exclude an individual) at £880,000.

The PRA has not amended the £440,000 total remuneration threshold at or above which an individual should be identified as an MRT if they also receive remuneration equal to or greater than the average remuneration awarded members of the firm’s management body and senior management and perform activities that have a significant impact on the risk profile of a Material Business Unit.

The PRA has also clarified that the requirement to identify employees who received in the previous year total remuneration within the highest earning 0.3% of employees (applicable to firms with more than 1,000 employees) needs to be applied at the level of the individual entity and not on a consolidated level.

The PRA has also made a consequential change to the Certification Part of the PRA Rulebook, by incorporating a cross-reference to the definition of MRT in the Remuneration Part, in order to maintain alignment between the two Parts.

A link to the full Policy Statement (which includes links to the updated rules and Supervisory Statement) can be found here.

 

Financial Services Reward Update – September 2021

Overview: On 8 September 2021, the Prudential Regulation Authority (PRA) published a Consultation Paper on proposed amendments to the PRA’s remuneration rules and regulatory guidance relating to Material Risk Taker (MRT) identification. The amendments incorporate into the Remuneration Part of the PRA Rulebook the provisions relating to MRT identification set out in the Regulatory Technical Standards (RTS) on MRT identification under CRD V which were published in the EU’s Official Journal on 9 June 2021, and make corresponding changes to the PRA’s Supervisory Statement on remuneration (SS2/17).


Firms in scope: Banks, building societies and PRA-designated investment firms, including third country branches.

Timing: The PRA has requested that any feedback on the proposed changes be provided by 8 November 2021. Subject to the extent and nature of the feedback received, the PRA is expecting that the amended rules and updated guidance will apply in relation to the first performance year starting after the publication of the final rules (currently planned for Q4 2021).

Key provisions to note: The Consultation Paper covers the following key areas:

  • The RTS on MRT identification under CRD IV were onshored into UK law at the end of the Brexit transition period. The PRA is proposing that the application of these provisions now be revoked, meaning that UK firms would no longer be obliged to consider the provisions of the CRD IV RTS when identifying MRTs.
  • The provisions of the RTS on MRT identification under CRD V (as published in the Official Journal in June 2021) will be incorporated directly into the Remuneration Part of the PRA Rulebook. These provisions will replace the current cross-references to the draft RTS on MRT identification which were published by the European Banking Authority (EBA) in June 2020. The amended remuneration rules will therefore expressly set out both the qualitative and quantitative criteria for identifying MRTs, as well as incorporating specific definitions relating to MRT identification (for example, regarding “business unit” and “core business line”). The PRA is also proposing to incorporate the provisions of the RTS relating to, for example, how remuneration should be calculated and the factors that firms should take into account for the purposes of determining whether an individual has a significant impact on the risk profile of a Material Business Unit.
  • The PRA’s Supervisory Statement on remuneration will also be updated to reflect the changes to the rules above, as well as to provide further detail on the process for firms to follow in relation to the exclusion of individuals as MRTs.

The amended rules are intended to incorporate the substance of the provisions in the finalised MRT RTS under CRD V, with any necessary changes in drafting only to ensure consistency with the PRA Rulebook.

A key point to note is that the PRA has proposed to set specific GBP thresholds for the purposes of applying the quantitative MRT criteria. The PRA considers that providing GBP thresholds will give firms greater certainty regarding the value of thresholds, irrespective of fluctuations in exchange rate.

The PRA is proposing to set the €750,000 total remuneration threshold (at or above which firms are required to obtain approval for the exclusion of individuals) at £660,000 and the €1 million threshold (where firms need to provide additional explanatory reasoning for proposing to exclude an individual) at £880,000.

The PRA is not proposing to amend the £440,000 total remuneration threshold contained within the current PRA remuneration rules (at or above which an individual should be identified as an MRT if they also receive remuneration equal to or greater than the average remuneration awarded members of the firm’s management body and senior management and perform activities that have a significant impact on the risk profile of a Material Business Unit).

A link to the full Consultation Paper can be found here.
 

Financial Services Reward Update – August 2021

We are pleased to share our summary of key reward regulatory developments impacting firms in the financial services sector over the past quarter. Our update covers the following:

  • The FCA’s letter to Remuneration Committee Chairs of Level 1 banks;
  • The FCA’s proposals to amend the UK Listing Rules to incorporate new diversity disclosure requirements;
  • The FCA’s Policy Statement regarding the implementation of the UK Investment Firms Prudential Regime;
  • Confirmation on the PRA’s approach to Material Risk Taker identification and exclusions, and publication of updated Remuneration Policy Statement templates;
  • The PRA’s correction to the definition of ‘higher paid Material Risk Taker’;
  • The PRA’s Policy Statement regarding the implementation of Basel standards;
  • The FCA, PRA and Bank of England’s publication of plans to improve diversity and inclusion in regulated firms;
  • ESMA’s consultation on draft MiFID II remuneration guidelines;
  • The EBA’s publication of its final revised Guidelines on sound remuneration policies under CRD V;
  • The EBA’s Report on the management and supervision of ESG risks;
  • The EBA’s publication of the final Regulatory Technical Standards on identifying Material Risk Takers under CRD V; and
  • The ECB and PRA’s decisions not to extend the restrictions on dividends.

You can read our quarterly summary here.
 

Financial Services Reward Update – April 2021

We are pleased to share our summary of key reward regulatory developments impacting firms in the financial services sector over the past quarter. Our update covers the following:

  • The PRA’s Consultation Paper on the revised definition of a ‘higher paid Material Risk Taker’ under the updated CRD V remuneration rules;
  • The FSB’s peer review report on the UK’s implementation of FSB remuneration standards;
  • The European Commission’s approval of the final Regulatory Technical Standards on identifying Material Risk Takers under CRD V;
  • The FCA’s draft remuneration rules under the new Investment Firm Prudential Regime (IFPR); and
  • The EBA’s publication of two final draft Regulatory Technical Standards on identifying Material Risk Takers and the use of instruments under the Investment Firms Directive.

You can read our quarterly summary here.

A link to the full letter can be found here. Firms should also note that the FCA has updated its main Remuneration webpage content to align with its focus on culture.

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