PS23/17: Remuneration: enhancing proportionality for small firms

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published a joint Policy Statement (FCA PS23/17 – PRA PS16/23) as regards the criteria to be classified as a smaller firm for purposes of applying less stringent rules on the remuneration requirements of such firms, including corresponding reporting obligations.
#### Background
Earlier this year, the FCA and PRA each launched a consultation – consultation (CP23/11) of the FCA and consultation (CP5/23) of the PRA (EventID 21202 and EventID 19879) – to revise the classification criteria of „small CRR firms“ dually regulated by the PRA and FCA (banks, building societies, investment firms) in an effort to improve proportionality in remuneration policies. Both regulators thereby proposed to set a limit based upon the total average assets of a firm (£4 billion or £20 billion, if certain other criteria are met), the volume of its trading activities, and the type of activities conducted by a firm. Additionally, both Authorities proposed to remove the malus and clawback requirement in remuneration plans of firms that meet the proposed small firm criteria. Malus thereby involves the adjustment of deferred variable remuneration policies following ex-post risk adjustments (future payments will be adjusted) and clawback is defined by the regulators as the getting back of already paid variable compensation. For purposes of prudential supervision, the PRA also proposed to require small firms to make additional disclosures to the PRA, if material changes occur in
– the ratio of the maximum payout of bonus and executive incentive schemes when compared to fixed remuneration; and
– the performance measures and the risk adjustment used to determine whether and how much their bonus schemes and executive incentive schemes will pay out.
#### Final policy
According to the PRA and FCA, most respondents welcomed the proposed changes as measures that „would make the UK a more attractive place to do business and innovate“. They also commended the joint approach of both regulators to harmonize regulations and to simplify the regulatory framework for smaller firms, while maintaining prudential oversight. Nonetheless, the regulators also received comments that requested the joint publications and effective dates of the new „small firm“ regime and the removal of the bonus cap or some further revisions as regards the remuneration policies of all supervised firms.
In view of these responses, the regulators have made NO material changes to their policies. All classification criteria have been retained and so has been the removal of the malus and clawback requirement. Also, the additional disclosures will be implemented as proposed. However, they have made some minor modifications to clarify the application of the thresholds in group settings as outlined in the policy.
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The proposed minor revisions to the FCA’s Senior Management Arrangements, Systems and Controls Sourcebook (SYSC), particularly to SYSC 19D and SYSC 27 to align the FCA Handbook with the PRA Rulebook, have been adopted as proposed.