2024 promises to be another busy year in the regulatory remuneration space. Banks will already be thinking about changes to their arrangements now the bonus cap has been lifted. Here’s a round-up of what else is new – some of it helpful – and what’s still to come.
New flexibility for “small” firms
Small dual-regulated firms (UK banks, building societies and third-country branches which are regulated by both the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA)) could enjoy new flexibility under a revised proportionality regime that applies for performance years starting on or after 8 December 2023.
The PRA and FCA’s aim in making these changes is to reduce the regulatory and cost burden for small firms to a level more appropriate to the risks that they pose, whilst making proportionality exceptions more widely available.
The first step for firms is to assess whether they qualify as “small” according to revised financial thresholds and criteria. Firms will now qualify as “small” if: (i) they have average total assets of GBP4bn or less; or (ii) they have average total assets of GBP20bn or less (increased from GBP13bn or less) and meet certain criteria intended to eliminate those with riskier business models. These tests must be met by each individual firm, and also by any UK consolidated group that they belong to, which could mean fewer firms than expected being able to benefit.
As for the new concessions, “small” firms will no longer have to apply malus, clawback, or bonus buyout rules to material risk takers’ (MRTs') awards for the 2024 performance year onwards (unless they choose to). They can still rely on other proportionality exceptions, and are no longer subject to the bonus cap (see our blog post: Bankers’ bonus cap lifted: what does it mean for banks?). However, they will have to comply with other safeguards, such as ensuring that variable pay is aligned with their long-term performance and that awards are justifiable.
Under revised disclosure requirements, “small” firms must also proactively disclose certain material changes to remuneration structures to their supervisors. The PRA points that this will enhance its ability to review and monitor their compliance with the rules more generally, indicating that, in spite of new concessions, smaller firms are still very much on the regulatory radar.
Full details of the changes can be found in the PRA/FCA’s final policy statement PS16/23 – Remuneration: Enhancing proportionality for small firms. The FCA has also updated its Proportionality Guidance and its Guidance on malus and clawback to reflect this new approach.
Alignment of PRA/FCA rules on identifying MRTs
Also helpful are the FCA’s minor changes to align with the PRA’s approach to identifying MRTs. These simplify what is expected of firms and avoid them having to grapple with two sets of (sometimes divergent) rules. FCA rules (in SYSC 19D of the FCA Handbook) now define “Code staff” as being those individuals identified as MRTs under the PRA rules, so firms compliant with the PRA rules will automatically be considered compliant with the FCA rules.
Linking remuneration to compliance
In its annual letter to RemCo Chairs of the largest firms, the FCA sets out some key areas to adopt in their remuneration approach for 2023/2024. This echoes themes from previous letters, in particular, the need for firms to link remuneration to positive customer-focused outcomes, a healthy culture and accountability, and achievement of ESG (sustainability-related) goals. The FCA will send its next collective letter in two years’ time, giving firms time to focus on these recurrent themes.
Focus on diversity and inclusion
Diversity and inclusion (D&I) is another recurrent theme for the FCA, as it reminds firms of their duty to maintain gender neutral pay policies and ensure that variable pay awards don’t discriminate on grounds of any protected characteristic.
This builds on the considerable regulatory focus we’ve seen on D&I in the sector, with consultation papers published by both the PRA and FCA in September 2023, and final PRA and FCA policy statements on a regulatory D&I framework expected later this year. Click here for our series of blogs on the proposals. The PRA has been more prescriptive, suggesting that Senior Managers responsible for D&I should factor this into the assessment of their remuneration. More generally, firms will likely need to consider the role that senior management remuneration can play in driving progress on D&I, to deliver on governance and wider changes.
More to follow?
There could be more in store, with a General Election bringing the possibility of further reforms, potentially even a U-turn to reinstate the bonus cap.
The PRA and FCA also allude to a potential wider review of their remuneration regimes. We shall wait to see whether this could mean a further scaling back of remuneration restrictions, to make the UK a more attractive base for firms, especially when compared with the US and Asian regimes.
