FCA and PRA policy statement changes: what small firms and banks need to know

On 5 December 2023, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), announced their joint policy statement on changes that apply to small firms.

The policy statement is relevant to UK banks, building societies, and PRA-designated investment firms, including third-country branches, which are subject to the Remuneration Part of the PRA Rulebook and the Dual-regulated firms Remuneration Code (SYSC 19D) of the FCA Handbook. 

It will also be of interest to solo-regulated investment firms that belong to a group to which the Dual-regulated firms Remuneration Code is applicable on a consolidated basis.

The changes are likely to be of interest to challenger banks and other small, growing financial services firms.

The new policy statement contains detailed revisions to the PRA/FCA remuneration rules. Important points to note are:

Threshold Adjustments

The FCA and PRA have amended the proportionality thresholds that define small firms by increasing the upper threshold for small firms with total assets in excess of £4bn from £13bn to £20bn (subject to those firms meeting updated additional criteria). This is intended to simplify the regulatory environment by aligning the remuneration rules with the Small Domestic Deposit Taker regime and to exempt more firms from malus and clawback requirements and buy-out rules relating to remuneration.

Group Compliance

The revised rules make clear that all firms within a consolidation group must meet the revised thresholds on a consolidated basis in order to benefit from the more proportionate regime. There was some uncertainty about this under the previous rules.

Risk Management

While small firms will be exempt from the malus, clawback and new hires rules, they should still only make variable remuneration awards where they are justifiable on sound financial and non-financial criteria and may voluntarily operate malus and clawback. There is also a new expectation for small firms to pro-actively disclose material changes to their remuneration structures.

Timing

The changes took effect on December 8 2023, and will apply to the performance year of a firm commencing on or after the same date. Amendments in the PRA supervisory statement and the FCA non-handbook guidance will also be enforceable from December 8 2023.

Commenting on the news, Head of Employee Incentives, Samantha Lenox, says:

The aim of the changes is to reduce the regulatory burden for small firms to a more suitable level due to the costs and burdens which were associated with these rules. The changes should make the UK a more attractive place to do business and to attract internationally mobile talent to work in the sector. However, the key issue in relation to relaxations relating to remuneration will be to balance proportionality with effective risk management structures when designing and operating pay arrangements, which are issues our team can assist with.