Financial sector pay reform: looking ahead

Pay regulation is a moving target – one thing gets crossed off your “to do” list but there are typically several more “to do’s” around the corner. It is the same story this year. Firms may be relieved to have 2016 arrangements in place (which for many PRA firms incorporate stricter deferral, vesting and clawback requirements), but attention must now turn to the next, and bigger, task of implementing the EBA Remuneration Guidelines from 2017. The PRA and FCA have confirmed that – bar one significant exception – they will comply fully with the Guidelines and they will expect firms to do the same.

The proportionality question

Detailed and long-term implementation planning is difficult, particularly for Level 3 firms, until the EU’s position on proportionality is confirmed. The EBA is calling for specific exceptions to be included in CRD IV but these would allow only rules on deferral and share-based payment to be disapplied and so would remove some of the current flexibility available to Level 3 firms. The “significant exception” is that qualifying Level 3 firms could continue to disapply the bonus cap – at least until it is made a blanket requirement under CRD IV. For larger firms, a key question is whether they will retain current flexibility for lower earning staff. The European Commission is expected to report back on CRD IV rules and clarify the position on proportionality shortly.

And the Brexit one

The other imponderable for firms is the outcome of the UK Referendum on 23 June. If there is a Brexit vote, the Government could in theory take the opportunity to repeal CRD IV restraints. But we expect this is unlikely because UK regulation has endorsed and even “gold-plated” many of the restraints (with the exception of the bonus cap) in response to perceived shortcomings in remuneration practices and their role in the financial crisis. Also, depending on the post-Brexit model, the UK would most likely be required to apply these constraints or equivalent rules to have continued access to the EU single market in financial services.

Start planning now

We will know more on both fronts by the end of June. In the meantime, it is a good idea to get ahead and identify how your remuneration structures and processes will need to change to address the EBA Guidelines (proportionality aside) and, as the staff net will be broadened, who else in your group workforce might be caught. The PRA and FCA have promised to consult on any rule changes that are required to implement the Guidelines.

Click here for a timeline of recent and expected developments to help you in your planning process.

If you have any questions about this blog post please contact Sheila Fahy or Sarah Henchoz