Key Proposals
Identifying Material Risk Takers (MRTs)
The remuneration rules primarily apply to MRTs, whose activities are considered to have a potentially material impact on a firm’s risk profile. MRTs are identified by firms through a continuous identification process based on both quantitative and qualitative criteria. The quantitative criteria are not considered to be fit for purpose for the UK. The Regulators are proposing to replace these with a single criterion that where an employee’s total remuneration places them within the 0.3 percent of highest earners within a firm but they are not captured as a material risk taker by the qualitative criteria, firms will need to consider their impact on the risk profile of the firm and make a reasoned assessment of whether the employee is a material risk taker.
The regulators also propose to reinstate the pre-CRD V threshold (adjusted for inflation) at which firms may disapply certain remuneration rules (such as deferral) to MRTs and propose that MRTs would need to meet the following conditions to benefit from proportionality:
- Total remuneration does not exceed £660,000; and
- Variable remuneration does not represent more than 33 percent of the employee’s total annual remuneration.
The Regulators also propose to remove the concepts of ‘higher paid material risk taker’ and ‘significant firm’. This is a further simplification as firms would only need to consider whether an MRT is above or below a single proportionality threshold.
Deferral Periods and Vesting
The Regulators are proposing the following key changes:
- To reduce the vesting period from seven years to five years for senior management function-holders approved by the PRA;
- To reduce the vesting period to four years in all other cases; and
- Where previously the portion subject to a deferred vesting schedule rose from 40 percent to 60 percent where variable remuneration was above £500,000, this threshold has now been raised to £660,000 (adjusting for inflation).
The consultation also proposes to allow vesting to start immediately, rather than three years from the point at which the award is made. This is a simpler approach which will allow bonuses to be received faster. The requirement for a proportion of an award to be made in financial instruments will remain but ‘holding periods’ will be removed, also allowing non-cash elements to be received faster.
The consultation also proposes that the prohibition on payment of interest or dividends on deferred instruments is removed.
Increased Accountability for Senior Managers
The Senior Managers and Certification Regime (SMCR) was introduced in 2016, resulting in the most senior executives becoming increasingly personally accountable for breaches of law and regulation and this trend continues in the consultation. The proposals aim to ensure that variable remuneration better reflects risk-taking outcomes and individual responsibilities with better links between the SMCR and remuneration regimes.
The Regulators are seeking to improve the link between remuneration and individual accountability by:
- Introducing a rule for firms to consider adjusting the remuneration of accountable individuals up the management chain in the event of failures in risk management;
- Introducing a requirement to ensure that senior management are accountable for their performance against PRA supervisory priorities; and
- Clarifying expectations for Remuneration Committees with regards to determining accountability for adverse risk events.
SMCR is currently under separate review by the Regulators following DP 23/3.
Simplification of Handbook
The FCA is proposing to consolidate rules which are currently duplicated in the FCA Handbook and the PRA Rulebook. This is intended to avoid unnecessary duplication and to ensure greater consistency and alignment of the Regulators’ remuneration rules by removing the need for the FCA to maintain its own set of parallel remuneration rules. This is likely to be a welcome proposal for dual-regulated firms.