In brief

The Financial Conduct Authority (“FCA”) and Prudential Regulation Authority (“PRA”) have recently published consultations relating to the implementation of the Capital Requirements Directive V (“CRD V”) in the United Kingdom. The consultations also address how the United Kingdom’s (“UK’s”) financial services remuneration rules will work effectively at the end of the transition period following the UK’s exit from the European Union (“EU”) on 31 December 2020.


Contents

PRA Consultation

On 31 July 2020, the PRA published a consultation paper in relation to its proposed changes to the PRA’s rules, supervisory statements and statements of policy to implement elements of CRD V. The proposed revisions to remuneration requirements apply primarily to UK banks, building societies and PRA-designated investment firms.
Some of the PRA’s proposals include: –

  • updating the basis for identifying certain categories of Material Risk Takers (“MRTs”), including for MRTs in branches of third-country firms;
  • amending the minimum deferral period for remuneration from three years to four years for certain MRTs who are not already subject to longer deferral periods;
  • modifying its existing rules to permit listed firms to include share-linked instruments in the instruments that must make up at least 50% of variable remuneration;
  • consulting on the CRD V requirement for firms to have gender neutral remuneration policies and practices;
  • amending its current approach to apply the CRD V requirements relating to the maximum ratio between fixed and variable remuneration, malus, clawback and buy-outs to all firms and to apply the same CRD V requirements, including the prohibition on guaranteed variable remuneration, to all MRTs; and
  • amending its approach to proportionality.

Firms will be required to apply the proposed amendments from the first performance year beginning on or after 29 December 2020. Where remuneration is awarded on or after this date in respect of earlier performance years, the PRA proposes that firms must comply with the rules that applied immediately prior to the proposed amendments.

Responses to the consultation are requested by Wednesday 30 September 2020 and a further consultation will be published in autumn 2020. To access the PRA’s consultation paper in full, please click here.

FCA Consultation

On 3 August 2020, the FCA published a consultation paper in relation to updating the Dual-Regulated Firms Remuneration Code to reflect CRD V. The FCA’s proposals are closely aligned with the approach taken by the PRA in the consultation paper described above and some of these proposals are described below.

  • Deferral Periods:
    • the FCA propose to apply different minimum deferral periods to individuals with a total remuneration of £500,000 or below; and
    • they propose to introduce a new category of MRT (namely, those who perform FCA-designated senior management functions).
  • Clawback:
    • for individuals with total remuneration of GBP 500,000 or below (who are caught by the rules), the FCA propose:
      • a minimum clawback period that covers the length of the minimum deferral period and minimum retention period; and
      • a minimum clawback period of 1 year for variable remuneration which is paid immediately and is not subject to deferral.
    • for individuals performing an FCA-designated senior management function who earn over GBP 500,000, the FCA propose to permit firms to extend the clawback period, in certain circumstances, to at least 10 years.
  • Proportionality:
    • the FCA propose to introduce a rule to exempt certain firms from applying the rules on deferral, pay-out in retained shares or other instruments, and holding and retention periods for discretionary pension benefits subject to meeting certain conditions.
    • To be exempt, a firm must not be a “large institution” and it must have an average of total assets equal to or below EUR 5 billion over the four years immediately preceding the current financial year.
    • To not be a “large institution”, a firm must not be: –
      • a global systemically important institution or other systemically important institution;
      • 1 of the 3 largest institutions in its Member State in terms of total value of assets; or
      • an institution with total assets (calculated either on an individual or a consolidated basis) equal to or greater than EUR 30 billion.
    • In line with the PRA, the FCA proposes to exercise its discretion to raise the proportionality threshold of EUR 5 billion to EUR 15 billion for firms who meet certain additional criteria.
    • In a move that will bring more individuals within the scope of the remuneration rules, the FCA proposes that the remuneration requirements on retained shares or other instruments, deferral, and the holding and retention periods for discretionary pension benefits shall only not apply to individuals if their annual variable remuneration does not: –
      • amount to more than one-third of total remuneration; and
      • exceed EUR 50,000.

Comments on the consultation paper are requested by 30 September 2020. To view the FCA’s consultation paper in full, please click here.