Financial firms classed as 'tier three' by the Prudential Regulation Authority (PRA) will be permitted to disapply the cap on bankers' bonuses, as part of the UK's proportionate application of the rules, the regulator has confirmed.
These firms will, however, be required to comply with the European Banking Authority (EBA) guidelines on sound remuneration policy in all other respects, according to two new publications by the UK banking regulator.
The PRA has published a policy statement giving consultation feedback about a new supervisory statement on remuneration policies, and setting out its finalised text. The new guidance applies to banks, building societies and PRA-regulated investment firms and is intended to help them comply with the requirements in the remuneration part of the PRA Rulebook. Many of these requirements are themselves set at EU level through the recast Capital Requirements Directive (CRD IV) and the related EBA guidelines.
The guidance in the new supervisory statement replaces a number of existing PRA policy documents and letters to firms covering aspects of remuneration, including proportionality and the application of the 'malus' rules allowing recovery of bonuses in certain circumstances. It also sets out additional expectations of firms.
Remuneration expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com, said that the new supervisory statement was "helpful in bringing together the PRA's existing supervisory statements on proportionality, the application of malus and other elements of remuneration, as well as further indications of expectations around remuneration".
"The clarifications made as a result of feedback to the consultation will be welcomed by those firms affected, providing greater certainty and increased consistency of approach," she said.
CRD IV permits firms to comply with the remuneration rules in a way that is appropriate to their "size, internal organisation and the nature, scope and the complexity of [their] activities" when setting remuneration policies for the material risk-takers (MRTs) employed by their firms. The PRA gives effect to the proportionality requirements by categorising firms into one of three 'tiers' based on relevant total assets.
The PRA has, however, stated that its remuneration policy "has been designed in the context of the current UK and EU regulatory framework".
"The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with the European Union take effect," it said.
The CRD IV bonus cap applies to senior staff, and is set at 100% of the individual's salary or up to 200% where member states permit and shareholders agree. The PRA has consistently objected to the introduction of a bonus cap as counter-productive, arguing that it will drive up fixed pay and therefore banks' fixed costs.
The new documents confirm that the PRA has notified the EBA of its compliance with all aspects of the EBA guidelines except for universal application of the bonus cap. The cap will, however, continue to apply to firms classed as 'tier one' or 'tier two'; effectively all banks, building societies and full-scope investment firms with over £15 billion in relevant total assets.
All firms within the scope of CRD IV, regardless of size, must comply with all other aspects of the EBA guidelines, as well as domestic requirements, according to the PRA.
"The PRA has not bent the knee to the new EBA guidelines' requirement that the CRD IV bonus cap be applied to absolutely all firms in scope, and it continues to permit proportionality tier three firms to disapply the cap," said remuneration law expert Graeme Standen of Pinsent Masons, the law firm behind Out-Law.com. "However, firms must comply with the new guidelines in all other respects."
"There could be a time limit on this national defiance however. It seems to me that EU law probably allows the PRA to do this quite securely at present, but probably will not do so if and when the proposed amendments are made to CRD IV to permit certain types of firm to disapply only certain MRT remuneration structure requirements, not including the bonus cap; and to generally tighten up the wording relating to 'proportionality'," he said.
Standen explained previously that the UK's position was arguably permitted by the original wording of the EU directive, as it was a breach of revised EBA guidelines that were mandated by CRD IV rather than a breach of CRD IV itself. However, amendments to CRD IV and related rules put forward by the European Commission last year appeared to give national regulators far less scope for derogations from the bonus cap on proportionality grounds.
"The changes could happen quite quickly, and before the UK leaves the European Union, but it remains to be seen just how difficult the implementation process might be," he said. "Even after Brexit, there could be very considerable pressure for the UK to maintain alignment with such an important aspect of EU financial services regulation in order to maximise access to the single market for the City."
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