FCA Consults on Implementing CRD V Remuneration Requirements

The Financial Conduct Authority (FCA) published a consultation paper on 3 August on amending its Dual-Regulated Firms Remuneration Code and relevant guidance in light of the EU’s revised Capital Requirements Directive (CRD V). The FCA has worked closely with the Prudential Regulation Authority (PRA) to align its approach with that taken in the PRA’s July 2020 consultation paper on CRD V. The FCA, whose consultation is scheduled to close on 30 September 2020, intends to publish a policy statement before 28 December 2020.

The European Union adopted CRD V in May 2019, which includes updated remuneration provisions. As EU member states must transpose these provisions by 28 December 2020, which is before the end of the UK’s Brexit transition period, the UK must also transpose CRD V under the terms of the EU Withdrawal Agreement.

The PRA published last month its consultation paper (CP12/20) on implementing CRD V. However, the FCA regulates remuneration for dual-regulated firms from a conduct perspective and so published a consultation paper (CP20/14) on 3 August 2020 on amending its remuneration rules and guidance for dual-regulated firms in light of CRD V.

The FCA’s proposed amendments are intended to ensure that its remuneration rules and guidance for dual-regulated firms remain largely consistent with the PRA’s approach and support its conduct-based objectives. They are also intended to ensure that the rules work effectively following the Brexit transition period.

SCOPE OF PROPOSED CHANGES

The FCA has proposed changes to the following:

• Dual-regulated firms Remuneration Code in its Senior Management Arrangements, Systems and Controls sourcebook (SYSC) at SYSC 19D
• Guidance titled “General Guidance on Proportionality – the Dual-regulated firms Remuneration Code”
• Guidance titled “Remuneration Codes (SYSC 19A and SYSC 19D) – Frequently Asked Questions on remuneration.”

TO WHOM DO THE PROPOSED CHANGES APPLY?

SYSC 19D generally applies to UK banks, building societies, and PRA-designated investment firms.

The proposed remuneration changes will not apply to solo-regulated investment firms, which should continue to apply the current IFPRU or BIPRU remuneration codes, as applicable. The FCA considered what the new regime for solo-regulated firms could look like in its June 2020 discussion paper on the new UK prudential regime for MiFID investment firms (DP20/2) and the Treasury aims to introduce the new UK prudential regime for solo-regulated firms by summer 2021.

WHAT ARE THE MAIN CHANGES?

Key proposed changes to the requirements under SYSC 19D include:

• adding examples of categories of staff who must be included as material risk takers and, therefore, within scope of the requirements;
• replacing existing proportionality thresholds with exemptions from certain rules for (1) firms with total assets averaging €5 billion or less over the previous four years (or €15 billion where certain criteria are fulfilled), and (2) individuals whose annual variable remuneration does not amount to more than one-third of the individual’s total remuneration, and does not exceed €50,000;
• revising the criteria for assessing whether a UK branch of a third-country firm is in scope;
• amending minimum deferral periods to bring them in line with CRD V and differentiate between requirements that apply to (1) PRA- and FCA-designated senior management functions and other material risk takers, and (2) individuals in scope of the remuneration rules;
• amending minimum clawback periods to take into account revised minimum deferral periods;
• requiring firms to have gender neutral remuneration policies and practices; and
• permitting listed firms to award variable remuneration in the form of share-linked instruments and equivalent noncash instruments.

Further, the FCA is proposing to make consequential amendments to its “General Guidance on Proportionality – the Dual-regulated firms Remuneration Code” and frequently asked questions on Remuneration Codes SYSC 19A and SYSC 19D. It is also proposing to split its existing frequently asked questions into two sets of frequently asked questions, i.e., one set for SYSC 19A and another for SYSC 19D.

The FCA recognises that remuneration is an important element of culture and the consultation paper enforces its continued focus on culture in financial services. While the proposed changes are largely not extensive, it is hoped that they could contribute to reducing the number of misconduct incidents and the level of harm caused and enhance consumer confidence.

NEXT STEPS

The FCA’s consultation is scheduled to close on 30 September 2020 and the FCA intends to publish a policy statement as soon as possible before 28 December 2020.

It is proposed for the amendments to the remuneration requirements to apply from the next performance year that begins on or after 29 December 2020.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Chris Warren Smith
Louise Skinner
Steven Lightstone
Thomas Twitchett