The PRA has launched a consultation which seeks to relieve the compliance burden on certain smaller CRR firms by removing the need to comply with certain of the remuneration rules which may currently apply to them. The way in which this will be done is to expand the definitions of Small CRR Firm and Small Third-Country CRR Firm (“Small Firms“), to remove the requirements for Small Firms to mandatorily apply malus and clawback and to no longer subject such firms to the buyout rules.
Small CRR Firms thresholds
The PRA proposes to amend the definition of “Small CRR Firm” and “Small Third-Country CRR Firm” broadly in line with the Simpler-regime size threshold under the Strong and Simple framework and associated criteria. The proposed definitions applicable for remuneration purposes would apply to a broader group of firms beyond those that qualify for the Simpler-regime, as certain of the criteria that a firm must meet to fall within the Simpler-regime are considered irrelevant to remuneration matters. The key points to note are that the current £13bn assets proportionality threshold is being increased to £20bn, with average assets to be measured over three years rather than four years and a new set of criteria will be introduced to determine whether this threshold, or the lower £4bn threshold, should apply.
A summary of the current and proposed definitions of a Small CRR Firm are set out in the table below. A firm must meet both conditions to qualify as a Small CRR Firm. The definition of a Small Third-Country CRR Firm will be amended on an equivalent basis.
|Current Definition||New Definition|
a) Average total assets at or under £4 billion; or
b) Average total assets exceeding £4 billion but not exceeding £13 billion.
and where (in the case of Condition 1(b)):
a) it is appropriate for the firm not to be required to comply with the rules;
b) the firm has a small trading book;
c) the total value of the firm’s derivative positions held with trading intent does not exceed 2% of its total on- and off-balance-sheet assets and the total value of its overall derivative positions does not exceed 5%; and
d) the firm is not subject to any obligations, or is subject to simplified obligations, in relation to recovery and resolution planning.
a) Average total assets at or under £4 billion; or
b) Average total assets exceeding £4 billion but not exceeding £20 billion.
and where (in the case of Condition 1(b)), subject to all the following Simpler-regime criteria the firm:
a) has a trading book business at or below 5% of the firm’s total assets and £44 million;
b) has foreign exchange positions at or below 3.5% of own funds and at or below 2% of own funds on average;
c) has no commodities or commodity derivatives positions;
d) does not provide clearing, transaction settlement, custody, or correspondent banking services to a UK bank or building society, or non-UK credit institution, including by acting as an intermediary for a UK bank or building society or such a credit institution to access certain facilities; and
e) is not an operator of a payment system.
In addition to Condition 1, there remains a Condition 2 that the firm is not part of a group containing another firm which is subject to the rules on an individual basis and has average total assets exceeding £13bn (proposed to be increased to £20 billion).
Malus/Clawback and Buyout rules
Small Firms would not be required to comply with the Rulebook requirements for malus and clawback to apply to any remuneration awarded for performance years which start following the proposals being implemented. As Small Firms are not required to apply deferral, in practice only clawback currently applies on a mandatory basis (albeit those Small Firms which apply deferral may operate clawback via malus adjustments to unvested deferred remuneration). If malus and/or clawback is applied on a voluntary basis then this does not need to be in line with the rules which apply to other firms on a mandatory basis.
In addition, Small Firms would no longer be required to comply with the buyout rules when hiring staff from other firms. Under the current regime, where a Small Firm buys out deferred bonus awards for staff, they are required to mirror the unvested remuneration structures of that former employer. If the former employer is a large firm, mirroring the deferral and instrument requirements applicable can involve significant costs and complexity and could lead to individuals failing to secure positions at those smaller firms. Removing the mirroring requirement could therefore lead to Small Firms being able to attract more talent.
The PRA’s proposals are couched as making the existing remuneration regime more proportionate and less burdensome for Small Firms, acknowledging that the implementation of CRD V in 2020 has resulted in increased costs for those firms. The PRA considers that the remuneration rules that will continue to apply to Small Firms are sufficient to manage risk, and that this is bolstered by a new expectation in the Supervisory Statement that Small Firms will disclose any material changes to their remuneration structures to their supervisory contacts.
Broadly speaking, the PRA is seeking to revert back to obligations which are closer to those which applied under the previous CRD IV regime, consistent with the PRA’s separate consultation on removal of the bonus cap (on which see our blog post here). The proposed amendments are also intended to further the PRA’s new secondary objective of facilitating effective competition. Reducing costs and the complexity of remuneration requirements should allow greater flexibility for small firms in how they design their remuneration structures, thereby supporting them in competing for talent.
The consultation is open to responses until 30 May 2023. It is anticipated that the final policy will then be published in Q4 2023, and would apply to performance years starting thereafter. For those firms with a calendar year financial year, this would mean the current rules would cease to apply for the 2024 performance year (i.e. for annual bonuses payable c. Q1 2025) onwards. The current rules would continue to apply for the 2023 performance year.
The consultation paper notes that the PRA is separately consulting on disclosure proposals under the Strong and Simple Framework. The PRA will consider the interaction of the disclosure proposals in that consultation with the above remuneration proposals; the PRA has stated that it intends to consult on its approach to remuneration disclosure requirements in the near future.