PS1/23 – Remuneration: Unvested pay, Material Risk Takers and public appointments

Following a consultation on proposed modifications to its Supervisory Statement (SS2/17) as regards remuneration of material risk takers (MRT) in banks, building societies, and PRA-regulated investment firms in July 2022, the Bank of England’s Prudential Regulation Authority (PRA) has now issued a corresponding new Policy Statement (PS1/23). Therein, the PRA outlines the feedback it has received to its consultation and issues the final Supervisory Statement (SS2/17) as it will apply from February 10, 2023.
To recall, the PRA sought to modify the Supervisory Statement to
1. clarify that instruments issued as part of the variable pay of material risk takers, e.g. interests in equity, should subsequently NOT be converted into other instruments. This expectation shall apply to „all unvested, deferred sums, and not exclude amounts above the regulatory minima“;
2. provide for an exemption from this approach where a MRT subsequently – after leaving the firm – moves on to a public appointment which might cause a conflict of interest. In such case, such instruments may be converted to cash payments provided that the firm seeks prior non-objection from the PRA and provided that the minimum retention requirement is still met; that is the retention period would also apply to the converted cash. Furthermore, in case the cash payment would lead to a violation of the obligation to make part of such deferred compensation in non-cash instruments (e.g. equities), the firm would have to apply to the PRA to get approval for such „violation“ – in other words, to receive a waiver from current PRA remuneration rules; and
3. clarify under which circumstances the PRA would likely grant any such waiver noted under (2).
In its final Policy Statement the PRA now states that it will proceed as proposed in the Consultation Paper with some minor modifications. These include:
– the addition of a new footnote 19 to clarify that an exemption from the conversion restriction may also apply and be granted in „other“ circumstances;
– the addition of a new footnote 20 to clarify the definition of the terms „equity“ and „other instruments“; and
– the addition of a new line in paragraph 4A.11 to require „a public sector employer to determine whether (or not) its conflicts of interest policy is able to address any conflicts“ in case a conflict of interest arises in view of a public appointment and the holding of deferred remuneration instruments in the retention period.