PRA proposals to facilitate MRT public appointments

Published Date
Aug 16, 2022
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For material risk takers (MRTs) and firms who may have grappled with remuneration restrictions when seeking public appointments, there is relief in sight. In a pragmatic move, the PRA is consulting on proposals to relax the strict application of the rules in these circumstances, and potentially in other (exceptional) conflict of interest situations.     

How would the PRA relax its rules?

Under the Remuneration Part of the PRA’s Rulebook, which applies to banks, building societies and the largest investment firms, at least 50% of an MRT’s variable pay must be awarded in shares (or share-linked instruments) or other qualifying instruments, and at least 40% must be deferred for four to seven years (depending on the firm and the MRT in question). Firms therefore have some degree of choice when determining whether awards should comprise shares and/or other instruments, but the rules are unclear as to whether they can convert one to the other, or either to a cash claim, prior to vesting. 

In Consultation Paper 8/22 - Remuneration: Unvested pay, material risk takers and public appointments, published on 15 July 2022, the PRA proposes revising its rule guidance (in Supervisory Statement (SS2/17)) to clarify when, exceptionally, such conversions may be made. It expects firms not to make them ordinarily, including to amounts above the minimum regulatory thresholds. However, in exceptional cases, for example, where an MRT’s or former MRT’s unvested, contingent claim to shares or other instruments creates an actual or potential conflict of interest with a proposed public appointment, the PRA may allow a conversion of those shares or instruments, provided certain conditions are met. 

Which conditions must be met?

The public appointment must be a senior role linked to financial policy or financial services regulation. Moreover, a firm must seek the PRA’s prior “non-objection” and present a reasoned case for the conversion request. This would have to address why a conversion (as opposed to, or in combination with, other means) would be appropriate and sufficient to manage the potential conflict. The retention requirements for vested awards would still apply.

The PRA’s expectations would be stricter for firms seeking a waiver or modification of the remuneration rules to convert unvested equity or other instruments to a cash claim.  These include that any cash claim would need to replicate the deferral, malus and clawback provisions of the original claim, and that no early payment could be made. Firms would also need to demonstrate how, contractually, the conversion is aligned with the regulatory remuneration rules (for example, by extending the vesting period to replicate the retention periods that would have applied).

How does this help financial services firms? 

If adopted, these proposals will help firms to facilitate the appointment of senior and key business people into relevant public roles – clearly a specific policy aim – while developing the expertise of the MRTs involved. There is no analogous relief to relax remuneration restrictions for PLC directors where conflicts arise in relation to public offices, leaving remuneration committees, public bodies and directors to deal with any such conflicts on a case-by-case basis. 

Firms may also be able to use this proposed flexibility in other conflict of interest situations, given the PRA discusses public appointments as only one source of the conflicts that could arise. That said, the proposals won’t generally assist with the appointment of MRTs to other (non-public) roles, including in competitor firms, as the PRA has confirmed that it won’t be changing its rules or expectations in this regard.

Finally, this initiative could be an encouraging sign for firms in a wider context. The PRA has proposed a relaxation or waiver of its rules (to allow the conversion of instruments post-grant and pre-vesting in this case) to avoid creating an undue burden on firms. Could this represent the start of a loosening of EU law-derived banking sector pay rules, and could other instances of regulatory pragmatism, or deviations from the general rules, follow? Watch this space…

Firms have until Monday 19 September 2022 to respond to the consultation. The PRA intends the changes to take effect from Monday 12 December 2022. 

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This content was originally published by Allen & Overy before the A&O Shearman merger