Hot on the heels of the consultation to remove the cap on bankers’ bonuses (CP15/22), the Prudential Regulatory Authority (PRA) has published a consultation paper on proposed changes to the remuneration regime for small firms (CP5/23). The consultation is open to responses until 30 May.
The aim of the consultation is to enhance proportionality for smaller firms and reduce their regulatory burden by removing the need to comply with specific remuneration rules.
Small firm definition
The consultation proposals include amending the definition of a small firm in line with the PRA’s Simpler-regime size threshold and other selected criteria. To benefit from the small firm remuneration regime firms will broadly need to have:
- Average total assets at or under £4 billion; or
- Average total assets over £4 billion and at or under £20 billion (up from the current threshold of £13 billion) and which meet certain other specified Simpler-regime criteria.
A further necessary condition is that firms must not be part of a group containing another firm that is subject to the remuneration rules on an individual basis and has average total assets exceeding £20 billion (again, up from the current £13 billion).
Remuneration rule changes
Firms which meet the amended definition of a small firm will no longer be required to comply with the current performance adjustment remuneration rules known as malus and clawback. Broadly, these rules manage risk by permitting employers to reduce a bonus award or requiring employees to repay some or all of a previously paid bonus in the event of certain negative circumstances, (such as misconduct or financial underperformance).
While affected employers may decide to maintain their current risk management approach and continue to operate malus and clawback rules voluntarily, there will be scope to tailor the current rules to meet the specific needs of the business.
Further, such firms will no longer need to comply with the rules in relation to deferred bonus award buy outs when recruiting new employees. The current need to match the award structure of a previous employer (which may be a much larger firm subject to more complex remuneration rules) can prove to be a substantial administrative burden for smaller firms. The PRA flags that greater flexibility in the remuneration regime for smaller firms may support them in competing for talent in the UK and promote competition in the financial services sector.
When will the changes apply?
If the proposals take effect in Q4 this year as expected, the changes will apply to the first new performance year that follows, namely 2024/25 for most small firms. In the meantime, the current rules on malus, clawback and buyouts will continue to apply during the 2023 performance year for small firms.
Following publication of the PRA’s final policy statement changes will be made to the Remuneration Part of the PRA Rulebook (see here) and updates made to the supervisory statement on remuneration (SS2/17) (see here). The PRA also proposes to consult separately on the remuneration-related disclosures that should be made by small firms.