23 March 2018
The Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) have each published Consultation Papers (CP13/5 and CP 13/6 respectively), concerning UK implementation of CRD IV and certain aspects of the remuneration provisions.
The CRD IV provisions relating to credit institutions (that is, banks and building societies) or investment firms will be implemented and supervised by the PRA, while the remaining provisions will be implemented by the FCA.
While the Consultation Papers do not provide detailed guidance on the remuneration provisions, both the FCA and PRA have stated that remuneration issues are raised in the Final Report of the Parliamentary Commission on Banking Standards (vol 3) and therefore, the issue of the application of these remuneration rules will be considered separately later on in the year. However, the FCA has emphasised that the principle of proportionality continues to be an important part of the remuneration framework in the Directive, which means the application of certain remuneration requirements may vary in relation to certain types of investment firms based on ‘their size, internal organisation and the nature, the scope and the complexity of their activities’.
Remuneration Code structure
Firms which are currently in scope of the CRD III but that will fall outside of the scope of CRD IV will still comply with existing CRD provisions. How these changes will affect the structure of the existing Remuneration Code will mean that there will now essentially be three codes in the Handbook as follows:
SYSC 19A: Which will reflect the CRD IV requirement, including the rules concerning bonus caps.
SYSC 19B: Which will contain the remuneration requirements for those firms falling within the scope of the AIFMD.
SYSC 19C: Reflecting the existing Remuneration Code, excluding the existing CRD IV provisions which will not apply to those firms that are not in scope.
Claw back and malus provisions
CRD IV includes a new requirement for firms to operate “claw-back” arrangements (rather than just malus arrangements as currently is the case) and for the malus and claw-back provisions to apply to all variable remuneration, and not just deferred variable remuneration.
Previously, the malus requirement could be disapplied by some firms on the grounds of proportionality, but as the FCA has not provided any guidance on proportionality in this area, it is unclear whether firms will be able to disapply this requirement. The introduction of claw-back will pose a challenge for some firms, particularly if firms will be required to implement the provisions in respect of remuneration awarded from 1 January 2014 onwards.
The closing date for responses to the PRA’s Consultation Paper is 2 October 2013, with the PRA intending to publish a Policy Statement in December 2013, which will include finalised rules. The FCA’s consultation closes on 30 September and the FCA will publish a Policy Statement later in 2013, with the final rules becoming available to firms before 1 January 2014.