PRA and FCA proposals to revamp bankers' remuneration rules would reduce the number of in-scope material risk takers (MRTs), while enabling more MRTs to benefit from proportionality exclusions. Banks would have greater autonomy when identifying MRTs but would need to tighten governance guardrails.
In the PRA and FCA's joint consultation paper (PRA consultation paper 16/24 | FCA consultation paper 24/23) on bankers' remuneration reform, they propose simplifying MRT rules to tailor them more for the UK while reducing costs and increasing flexibility for banks. For our more detailed commentary on the MRT proposals and their impact, as well as action areas for banks, please download the PDF version of this alert. For more background on the reforms, and on the "banks" within the scope of the rule changes, please see our earlier blog UK bankers' remuneration: significant reform proposals.
What are the changes?
Banks must currently identify MRTs (whose activities have a material impact on a bank's risk profile) using minimum qualitative (role-based) and quantitative (remuneration-based) criteria. The PRA and FCA's proposals are:
- Simplified quantitative thresholds: A single quantitative threshold would apply, whereby banks would be expected to consider identifying employees within the 0.3% of highest earners (based on their total remuneration in the previous performance year) as MRTs. They could still decide not to identify those individuals as MRTs, assuming that they aren't otherwise captured by qualitative criteria. The PRA's Supervisory Statement SS2/17 would expand on the qualitative criteria pointing to a determination of MRT status.
- Simplified exclusions process: Firms would no longer have to seek PRA approval to exclude someone as an MRT on account of the quantitative threshold, nor to conduct the associated regulatory reporting.
- Tighter governance expectations: There would be enhanced governance expectations around MRT identification processes and decisions, including oversight from the management body and manager in charge of a bank's risk controls, the involvement of relevant staff, and a review of MRT methodologies annually. Thorough record-keeping would be required, including documentary evidence in support of any determination that someone isn't an MRT, which the PRA could request.
- Higher proportionality thresholds: The MRT remuneration threshold at which certain remuneration rules (such as deferral or payment in instruments) can be disapplied would be increased to cover those with total annual pay not exceeding GBP660,000 (up from GBP500,000) and with variable pay not exceeding 33% of their total pay.
How can banks get ahead?
Although the changes are still under consultation, banks may wish to get ahead in the following areas:
- Reviewing and monitoring MRT lists to identify staff whose status or pay restrictions might change, and whose arrangements might need to change. This will include reassessing their status and obligations under the SMCR if they might cease to be MRTs.
- Benchmarking current MRT identification and record-keeping processes against the proposals and identifying where these need to be bolstered. This will include reviewing the criteria taken into account, as well as who is involved in MRT assessments. Managers with overall responsibility for risk controls, management body members and control functions, among others, would need to have significant involvement going forward (if they don't already).
- Considering the impact of staff ceasing to be MRTs on employment and remuneration arrangements, such as fixed pay allowances.
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