PRA has launched a consultation on its proposed expectations in respect of changes to the instruments or claims that comprise unvested, deferred sums awarded to Material Risk Takers (MRTs) as part of their variable pay.
The CP is directly relevant to PRA-authorised banks, building societies, and PRA-designated investment firms, including third country branches, subject to the Remuneration Part of the PRA Rulebook (firms).
Under the proposals, there would be an expectation that firms should not ordinarily convert unvested, deferred pay awards to MRTs from equity to other instruments (or vice versa). However, there may be circumstances, notably seeking to address a conflict of interest that might arise from a public-sector appointment, where conversion might occur subject to the PRA’s prior non-objection.
PRA proposes to amend SS2/17 to outline the circumstances in which it is more likely that a waiver or modification to its rules would meet the FSMA statutory test, where, in wholly exceptional circumstances, an adjustment is sought in relation to a public-sector appointment with a view to converting an award comprising equity or other instruments to a cash sum. In such cases, it is envisaged that such a conversion would be subject to contractual terms that ensured the discipline inherent in the PRA’s remuneration rules was maintained.
It is proposed that a new section is added to chapter 4 of SS2/17 setting out the PRA’s expectations that:
- in general, unvested, deferred claims that comprise the variable pay of MRTs should not be converted from an equity claim into a claim on other instruments (or vice versa) after an award has been made;
- this expectation should apply to all unvested, deferred sums, and not exclude amounts above the regulatory minima; and
- in exceptional circumstances, such as where there are potential conflicts of interest arising from a (proposed) public-sector appointment that cannot otherwise be sufficiently mitigated, it may be appropriate for a conversion to occur subject to the prior non-objection of the PRA, and on the basis that the relevant retention requirements remain unchanged.
PRA considers that in wholly exceptional circumstances, where conversion to an award that comprises other instruments is not sufficient to mitigate conflicts, conversion to cash may be appropriate. Where conversion to cash would breach the minimum non-cash instruments requirement, this would require a waiver or modification, where the PRA would consider any application in each particular case in accordance with the statutory test.
The consultation closes on Monday 19 September 2022, with the expected date of implementation being 12 December 2022.