CP14/23 – Pillar 3 remuneration disclosure

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Responses are requested by Wednesday 20 September 2023.

Please address any comments or enquiries by email to:
CP14_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Reporting, Disclosure and Data Strategy & Governance Remuneration and Controls, Prudential Policy Department
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1. Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals to enhance proportionality of Pillar 3 remuneration disclosure requirements, by reducing the number of remuneration disclosures required for many smaller banks and building societies. This consultation follows on from the PRA’s February 2023 consultations: CP4/23 – The Strong and Simple Framework: Liquidity and Disclosure requirements for Simpler-regime Firms and CP5/23 – Remuneration: Enhancing proportionality for small firms.

1.2 CP4/23 and CP5/23 stated that the PRA would consider the interaction of the disclosure and remuneration proposals and intended to consult on the new remuneration disclosure requirements in the near future; both of which have been set out in this CP. The proposals in this CP should not be taken as an indication of the PRA’s views on the responses to CP4/23 and CP5/23 as the PRA is still considering these. The PRA is consulting at this time with the aim of delivering a complete disclosure package for firms in scope of CP4/23 and CP5/23; therefore, the PRA is consulting with reference to the proposed policy set out in CP4/23 and CP5/23.

1.3 This CP is relevant to PRA-authorised banks and building societies, and prospective entities interested in, and currently applying for, authorisation as a deposit-taker. The PRA considers that the proposals in this CP would be of particular interest to firms that expect to meet the proposed Simpler-regime criteria set out in CP16/22, firms that expect to meet the proposed criteria to apply the simpler remuneration regime as per CP5/23, and current small and non-complex institution (SNCI) firms who will not be Simpler-regime Firms, but may fall under the scope of the CP5/23 proposals in the future. The proposals in this CP are also relevant to the users of the Pillar 3 disclosures made by the aforementioned firms.

1.4 The responses to this CP will be shared with the Financial Conduct Authority (FCA).

1.5 The existing remuneration requirements set out in the Disclosure (CRR) Part of the PRA Rulebook apply to the following populations of firms that would be impacted by the proposals set out in this CP:

• ‘Small and non-complex institution’ as defined in paragraph 145 of Article 4(1) of the CRR. Hereafter referred to as ‘SNCI’ within this CP.
• ‘Other institutions’ subject to Article 433c of Disclosure (CRR). Hereafter referred to as ‘Other firms’ within this CP.

1.6 The proposals in this CP would primarily impact the three populations of firms below:

• Firms captured under the Strong and Simple Framework: Simpler-regime Firms as defined in Table 1 in Chapter 2 of CP16/22 and Simpler-regime consolidation entities as defined in the PRA Rulebook Instrument annexed to CP4/23. Together, these firms are hereafter referred to as Simpler-regime Firms within this CP.
• Firms captured under the remuneration regime that would meet the definition of small Capital Requirement Regulation firms as described in paragraphs 2.2 to 2.5 of CP5/23 and the PRA Rulebook Instrument annexed to it. CP5/23 defined small firms as small CRR and small third-country CRR firms. In this CP, the scope only applies to small CRR firms, hereafter referred to as small remuneration firm within this CP.
• SNCIs that are not eligible to be Simpler-regime Firms, but are eligible to be small remuneration firms. Under the proposals in CP4/23, these firms would be subject to a transitional measure preserving the existing SNCI disclosure requirements for a period of three years. Hereafter, these firms are referred to as SNCI transitional firms within this CP.

1.7 Furthermore, in line with current disclosure requirements, the proposals in this CP apply separately to firms with listed instruments (listed) and firms with no listed instruments (non-listed).^{footnote [1]} Chart 1 illustrates the different populations of firms that are subject to the current disclosure requirements, and the remuneration disclosure populations that would arise from the proposals set out in this CP.

Chart 1: Comparison of the existing populations set out in Disclosure (CRR) Part of the Rulebook and proposed remuneration disclosure populations set out in this CP

Footnotes

• Large Basel 3.1 firms are outside the scope of this CP and are shown in the Chart for illustrative purposes.

1.8 The policy proposals in this CP would result in the following changes to the Disclosure (CRR) Part (Appendix 1):

• Simpler-regime Firms:
  • For listed firms, introduction of a requirement to disclose parts of the UK REMA template corresponding to paragraphs (a) to (d) of Article 450(1) of the Disclosure (CRR) Part as well as the UK REM 1 template.
  • For non-listed firms, exclusion from the requirement to disclose any information on remuneration.
• Small remuneration firms, that are not eligible to be Simpler-regime Firms:
  • For listed firms, modify the remuneration disclosure requirements under Article 433c (‘Other’) to only disclose parts of the UK REMA template corresponding to paragraphs (a) to (d) of Article 450(1) of the Disclosure (CRR) Part as well as the UK REM 1 template.
  • For non-listed firms, modify the remuneration disclosure requirements under Article 433c (‘Other’) to exclude the requirement to disclose any information on remuneration.
• SNCI transitional firms:
  • For listed firms, modify the transitional requirements to only disclose parts of the UK REMA template corresponding to paragraphs (a) to (d) of Article 450(1) of the Disclosure (CRR) Part as well as the UK REM 1 template.
  • For non-listed firms, modify the transitional requirements to exclude the requirement to disclose any information on remuneration.

1.9 The PRA considers that the public disclosure of a firm’s remuneration practice is important in providing market participants with transparency of the relationship between risk taking and individual reward of a firm’s supervisory and management function. However, for disclosures to be beneficial, they need to be focused on information that is of value to investors and other market participants that are capable of and likely to exert market discipline on a firm.

1.10 The PRA’s proposed simplifications to the remuneration regime set out in paragraph 2.2 of CP5/23 would apply to a wider set of small firms beyond those that qualify for the Simpler regime as proposed under the Strong and Simple framework (CP4/23). In setting out the proposals in this CP, the PRA has considered the interaction of the thresholds for these two regimes; and how to apply proportionate remuneration disclosure requirements without creating undue complexity and making it simple for Pillar 3 producers and users to understand what disclosures should be made in order to facilitate market discipline.

1.11 The PRA has a statutory duty to consult when introducing new rules (FSMA s138J). 

1.12 In carrying out its policy making functions, the PRA is required to comply with several legal obligations. Appendix 2 lists the statutory obligations applicable to the PRA’s policy development process. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Background

1.13 Existing Pillar 3 remuneration disclosures provide an overview on remuneration of material risk takers (MRTs),^{footnote [2]} alongside an overview of the key features and objectives of firm remuneration policy. The PRA considers that Pillar 3 disclosures on remuneration support effective market discipline by allowing market participants to assess the quality of the remuneration practices and the firm’s remuneration policy. This ensures greater alignment between risk taking and individual reward, in turn promoting safety and soundness. However, the PRA recognises the need to be proportionate to the nature, scale, and complexity of institutions, including the applicable remuneration requirements, and the users capable of exercising market discipline.

1.14 The PRA consulted on the introduction of broader disclosure requirements for Simpler-regime Firms, and the removal of the current SNCI disclosure requirements in paragraph 6.19 of CP4/23. However, the PRA did not consult on remuneration disclosure requirements, and stated this would be considered later given the interactions with the concurrent remuneration proposals in CP5/23. Within CP4/23, the PRA acknowledged the greater ability of market participants to exercise market discipline with respect to listed firms via the formal avenues present within debt and capital markets (eg shareholder voting, transacting in a firm’s financial instruments, or the provision of advice to influence the capital allocation decisions of others). The PRA considers that disclosure of information on remuneration by firms meeting the Simpler-regime criteria would also be subject to the same rationale behind the CP4/23 proposals.

1.15 Alongside CP4/23, the PRA consulted in CP5/23 on amending the definition of small CRR firm and small third-country CRR firm for remuneration purposes. In many areas, the proposed criteria are aligned to the Simpler-regime definition; firms which meet the Simpler-regime criteria should also benefit from the proposed simplifications to the remuneration requirements (see Chart 1).

1.16 However, the PRA’s proposed simplifications to the remuneration regime would also apply to a wider set of small firms. For all those firms captured under the small remuneration firm, the PRA proposes to remove the requirement to apply rules on malus, clawback, and buyouts.

1.17 The definition of small remuneration firm consulted on in CP5/23 includes a larger population of firms than the Simpler-regime Firms (see Chart 1). The PRA considers a consistent threshold for remuneration disclosure across firms of a similar size would support the transparency of Pillar 3 requirements and avoid undue complexity in the PRA’s remuneration disclosure rules.

1.18 The PRA proposes to publish the final policy on remuneration disclosures as part of the Strong and Simple framework expected in 2023 Q4, and to align the implementation date for proposals set out in this CP with the Pillar 3 proposals set out in CP4/23. This is currently expected to be early in the second half of 2024.

Responses and next steps

1.19 This consultation closes on Wednesday 20 September 2023. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to
CP14_23@bankofengland.co.uk. Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.20 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [3]}

2. The PRA’s proposals

Remuneration disclosure requirements for small firms

2.1 Current remuneration disclosure requirements apply to SNCI, Other firms and Large firms,^{footnote [4]} and require six remuneration templates to be disclosed by both listed and non-listed ‘Other’ institutions, and five remuneration templates disclosed listed SNCI’s.^{footnote [5]} Non-listed SNCIs are not required to make remuneration disclosures within Pillar 3. CP4/23 introduces a new regime and disclosure requirements with respect to key regulatory metrics, limiting Pillar 3 disclosure to listed Simpler-regime Firms.

2.2 The PRA proposes to apply proportionate remuneration disclosure requirements to the following firms:

• Firms that satisfy the Simpler-regime criteria described in CP4/23 – these firms will apply Article 433b of the Disclosure (CRR) Part;
• Other small CRR firms described in CP5/23 –these firms will apply Article 433c of the Disclosure (CRR) Part;
• Firms that apply the SNCI transitional provision described in CP4/23 – these firms will apply Article 433b(3) of the Disclosure (CRR) during the transitional period.

2.3 The proposals would result in a consistent level of remuneration disclosures across both Simpler-regime Firms and small remuneration firms. The proposals would consider the appropriate level of remuneration disclosure requirements for such firms, compared to the level of capital disclosure requirements and the level of remuneration requirements applicable to such firms.

Disclosure by listed Simpler-regime Firms

2.4 The PRA proposes to require listed Simpler-regime Firms to disclose the following existing annual Pillar 3 disclosures templates with respect to remuneration:

• UK REM1 – Remuneration awarded for the financial year
• parts of the UK REMA template (remuneration policy) corresponding to paragraphs (a) to (d) of Article 450(1) of the Disclosure (CRR) Part.

2.5 The PRA considers that the proposed disclosure of UK REM1 by listed Simpler-regime Firms would provide a baseline level of transparency regarding remuneration awarded to senior management functions in the year. The PRA considers that the disclosure of key detailed information on remuneration of these personnel is important for market participants to conduct meaningful assessment of a firm’s remuneration practice and determine if aggressive remuneration structures are being applied, and to apply market discipline. This is especially important for smaller firms where the regulatory remuneration regime is not as prescriptive as for larger ones.

2.6 The PRA considers that the disclosure of a listed Simpler-regime Firm’s remuneration policy via the existing template of UK REMA is important for market participants to meaningfully assess the remuneration policies and practices of the firms. The information contained in this template adds useful context to the remuneration awarded to supervisory and management functions in the year (via UK REM1) by explaining how such figures were determined. Furthermore, REMA provides an overview of the design and structure of remuneration, and a description of the ways in which current and future risks are considered in a firm’s remuneration. REMA also provides beneficial information on the variable/fixed remuneration ratio.

2.7 Rule 6.2 of the Remuneration Part of the PRA Rulebook requires firms to ‘establish, implement, and maintain a remuneration policy, practices, and procedures which are consistent with and promote, sound and effective risk management and do not encourage risk-taking that exceeds the level of tolerated risk of the firm’. The disclosure of a firm’s remuneration policy, decisions, and governance processes within REMA allows market participants to assess the extent to which firms’ remuneration policies meet these aims and to apply market discipline, in turn promoting more prudent risk management practices and firm safety and soundness.

Disclosure by non-listed Simpler-regime Firms

2.8 The PRA proposes to exclude non-listed Simpler-regime Firms from the requirement to disclose any information on their remuneration practices. The PRA considers that market participants may not have direct means to exert sufficient influence over the remuneration practices of non-listed Simpler-regime Firms. As a result, the ability of market participants to encourage market discipline to ensure compensation practices and the firm’s risk management are aligned may be significantly constrained, and would not justify the costs of producing the disclosures. This proposal maintains a consistent outcome to that proposed in CP4/23 whereby non-listed Simpler-regime Firms would not disclose a Pillar 3 report at all, by not reinstating a requirement to disclose Pillar 3 just for remuneration disclosures.

Small remuneration firms that are not eligible to be Simpler-regime Firms

2.9 Firms that would fall under the proposed small remuneration firm definition, but not the Simpler regime would be subject to remuneration disclosure requirements applicable to ‘Other’ institutions under Article 433c of the Disclosure (CRR) Part. As set out above, this could result in inconsistent levels of remuneration disclosure across a similar population of firms. Therefore, the PRA proposes to introduce an exception within Article 433c to apply the proposed remuneration disclosure requirements set out in paragraphs 2.4 (listed) and 2.8 (non-listed) to ‘Other’ firms which are small remuneration firms. This would introduce proportionate requirements for small remuneration firms, by reducing remuneration disclosure requirements to be in line with the firm’s size, internal organisation, and the nature and scale of their activities, with respect to their remuneration practices.

SNCI transitional firms that are eligible to be small remuneration firms

2.10 Under the proposals set out in CP4/23, a three-year transition period will apply immediately on the proposed implementation date of the Strong and Simple framework in H2 2024. While this proposed transitional was designed to give SNCI transitional firms time to prepare for the more numerous disclosures requirements of Other firms, it would have the effect of delaying the proposed proportionate remuneration disclosures set out in 2.9. For such firms, the current SNCI disclosure requirements would continue to apply during that period, including the requirement to disclose five templates on remuneration for listed SNCI transitional firms. The PRA considers that the deferral of the proportionate remuneration disclosure that the transitional would result in would be disproportionate to the end state requirements set out in 2.9 that would apply once the transitional ends.

2.11 Therefore, the PRA proposes to modify the proposed transitional provision (Article 433b(3)) consulted on in CP4/23, to ensure these firms are scoped into simpler remuneration disclosures set out in 2.4 (listed) and 2.8 (non-listed) for the duration of the SNCI transitional period. After which, these firms would be subject to the modified Article 433c proposed in 2.9 (see Chart 1).

2.12 The PRA notes that branches are not required to meet disclosure requirements under PRA rules. Consequently, the PRA has not included these firms in scope of more proportionate disclosures.

PRA objectives analysis

2.13 The PRA has considered how to update the disclosure framework with respect to remuneration disclosures for ‘small CRR firms’ and Simpler-regime Firms in a way which facilitates the transparency needed to facilitate market discipline, consequently promoting safety and soundness.

2.14 The PRA has also considered how its proposals can be implemented in a proportionate manner and reflect the differing complexities of Simpler-regime Firms and; therefore, facilitate effective competition and growth.

2.15 The PRA considers its proposal to only require listed Simpler-regime Firms and listed small remuneration firms to disclose key information on the firm’s remuneration practice would maintain the existing level of firms’ safety and soundness. By requiring a base level of remuneration information relative to a firm’s risk profile, this proposal ensures market discipline on the firm’s remuneration practice can be applied in an efficient manner, in turn supporting safety and soundness. The PRA also considers that the proposed disclosure requirements would advance safety and soundness by avoiding unnecessary cost burdens. Overly complex prudential requirements for small firms could increase their costs, which could undermine their safety and soundness.

2.16 The PRA considers the proposal not to require any remuneration disclosures by Simpler-regime Firms and small remuneration firms without listed financial instruments is consistent with the PRA’s primary objective, given the less direct and potentially less significant impact of market participants’ influence on the remuneration practices of these firms.

2.17 The PRA considers the proposals would reduce the potential administrative and assurance work associated with the preparation and understanding of remuneration disclosure requirements, which in turn reduces operational costs. Potential higher costs due to overly complex regulatory requirements could deter new entrants, and lead to an excessive cost burden on existing firms. Consequently, the PRA’s proposals should promote competition in the sector.

2.18 The Financial Services and Markets Act 2023 includes measures to amend the PRA’s objectives by introducing a new secondary competitiveness and growth objective. The new secondary objective requires the PRA (in discharging its general functions in a way that advances its primary objectives in so far as reasonably possible) to act in a way that facilitates (subject to aligning with relevant international standards): (a) the international competitiveness of the economy of the UK (including, in particular, the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

2.19 The PRA considers that by potentially lowering costs for affected firms, the proposals could support competitiveness and growth by enabling them to allocate their resources in an efficient manner. Furthermore, the proposals could also facilitate competitiveness and growth as they would support the attractiveness of the UK as a place to do business by reducing the regulatory burden on firms entering the UK market and meeting the relevant criteria, while also allowing for transparency and market discipline. A more proportionate approach to the application of remuneration disclosure requirements can also support growth as it would reduce ongoing implementation costs of the PRA’s remuneration regime. The proposals within this CP are in keeping with international standards.

Cost benefit analysis (CBA)

2.20 The baseline for comparison in this section is the existing remuneration disclosure requirements set out in Articles 433b and 433c of the Disclosure (CRR) Part.

Benefits

2.21 The PRA considers that there would be a cost-saving benefit associated with the reduction in remuneration disclosure requirements for affected firms.

2.22 For listed firms in scope of the proposals within this CP, these benefits would stem from the reduction in remuneration templates reported. For these firms that currently qualify as ‘Other' under the current Disclosure (CRR) Part, the PRA considers the cost saving would be significant, as there would no longer be a requirement to disclose UK REM 2 to UK REM 5, and certain elements of REMA. Furthermore, the PRA considers such firms that currently qualify as SNCIs would also see a significant impact, as there would no longer be a requirement to disclose templates UK REM 2 to UK REM 4. This would also be the case for non-listed ‘Other’ institutions which are small CRR firms, whereby there would no longer be a requirement to produce remuneration disclosures.

Costs

2.23 The PRA considers that the main cost associated with these proposals is related to the reduction of publicly disclosed information on remuneration practices for Simpler-regime Firms and small remuneration firms. Remuneration disclosures provide transparency of the relationship between risk taking and individual reward of a firm’s supervisory and management function to the market and can allow for market discipline to be exerted on firms.

2.24 For listed Simpler-regime Firms and small remuneration firms, the PRA considers that limiting remuneration disclosures to key information of a firm’s remuneration practice would maintain a proportionate level of information disclosed by these firms that reflect the core remuneration practice. The PRA considers that the impact of the proposed streamlining of remuneration disclosures would not result in a cost or loss of material information to market participants, given the detailed templates provide supplementary information on remuneration practices and are likely to not be relevant for such firms with simpler business models and risk profiles. The PRA has considered the responses to DP1/21 whereby some respondents saw scope for more simplification in the existing Pillar 3 disclosures.

2.25 For non-listed firms in scope of the proposals within this CP that are currently considered ‘Other’ institutions, the PRA considers that there is less capacity for market participants to use remuneration information disclosed to exert discipline on their remuneration practices. Therefore, the potential for any loss of prudential benefits (to safety and soundness) via the application of market discipline is likely to not be material.

‘Have regards’ analysis

2.26 In developing these proposals, the PRA has had regard to the FSMA regulatory principles. The proposed new rules are CRR rules (as defined in section 144A of FSMA), and; therefore, the PRA has also taken into consideration the matters to which it is required to have regard when proposing changes to CRR rules. The Financial Services and Markets Act 2023 includes a measure to amend the FSMA regulatory principles to include a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

1. Proportionality (FSMA regulatory principles) and the principle that regulators should base their regulatory activities on risk (Legislative and Regulatory Reform Act 2006): The PRA considered the effect of size, listing status, and the appropriate remuneration information needed for market discipline. The PRA also considered whether for smaller and non-listed firms, the safety and soundness benefits of disclosure on remuneration practices would be commensurate to the administrative resources required to produce remuneration disclosures. Furthermore, the PRA had regard to how remuneration disclosure requirements across the differing population of firms could be applied. Additionally, in aligning the remuneration disclosure requirement to the Disclosure (CRR) Part, the PRA has had regard to transparency, as this alignment ensures that firms are not subject to a differing and unnecessarily complex set of prudential thresholds.

2. Different business models (FSMA regulatory principles): The PRA’s proposed approach recognises that Simpler-regime Firms and small CRR firms should have an appropriate level of disclosure requirements commensurate to their size, risk profile, nature, complexity of the institution, and regulatory remuneration requirements.

3. Competitiveness (HMT recommendation letters): The PRA considered the time and resources needed by Simpler-regime Firms and other small CRR firms to comply with disclosure requirements and the effect this could have on their competitiveness in the UK markets and contributions to economic growth. The PRA also considered the resources available to Simpler-regime Firms compared to larger firms, and the impact on resources of having simplified disclosure requirements for Simpler-regime Firms. The PRA’s proposed approach seeks to reduce regulatory burden, allowing a more efficient allocation of resources within the firm.

4. Smart regulatory reform (HMT recommendation letter): The PRA considers that the proposals set out in this CP would be consistent with the Government’s aim to deliver smart regulatory reform because they would streamline regulatory requirements to target risk more effectively for small domestic banks and building societies.

2.27 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

Impact on mutuals

2.28 FSMA requires that the PRA assesses whether, in its opinion, the impact of its proposals on mutuals will be significantly different from the impact on other firms, and if so, to provide details of the difference. The proposals would apply equally to all in scope CRR firms including mutuals. The PRA recognises the proposals distinguishes between firms based on listing status. The majority of small mutuals are non-listed; therefore, the non-listed requirements may be of particular interest to mutuals. However, the distinction on the listing status of firms is relevant to all firms in scope of the proposals. The PRA; therefore, considers that the impact of the proposals on mutuals would be no different from the impact on other firms.

Equality and diversity

2.29 In making its rules and carrying out its policies, services, and functions, the PRA is required by the Equality Act 2010 to have due regard to the need to eliminate discrimination, to promote equality of opportunity, and to foster good relations between persons who share a protected characteristic and those who do not.

2.30 The PRA considers that its proposals on remuneration disclosure requirements would not have a direct impact on equality and diversity. The PRA will continue to consider the equality and diversity implications of the proposals during the consultation period and will revisit them when making any final rules which result from this consultation.