The senior manager regime - thinking through the remuneration implications
08 May 2015
In the last few weeks, I've been spending a lot of time talking with banks about the latest potential changes to pay regulation requirements in Europe. As part of this conversation a topic that keeps coming up is how the senior manager and certification regimes (SMR and CR) fit into this picture. It's a complex question and the answer varies significantly for different companies. However, there are two key areas where careful thinking will be needed.
Last year all firms within the scope of the Capital Requirements Directive ("CRD") were required to identify "material risk takers" (often called MRTs) in line with a set of definitions and tests set out by the European Banking Authority (the "EBA"). This identification was specifically required under the remuneration requirements of CRD IV and was implemented in the UK through the PRA and FCA Remuneration Code. Although all firms in scope were required to undertake this review the implications were most significant for larger firms who were required to comply with specific remuneration requirements for these individuals, including the "bonus cap".
So what's the connection to SMR and CR? Here is the use of the EBA definition of MRTs. The PRA have chosen to adopt this same definition to identify who should be captured under the PRA certified population. This has a number of direct implications. Critically, it will be very important to ensure that a consistent (or identical) approach is adopted to identifying the certified population as was adopted last year when MRTs were identified for remuneration purposes. Without this cross check occurring there is a risk that the work done by firms last year on this could be undermined, potentially bringing different individuals into the scope of specific remuneration requirements.
Without question one of the biggest issues firms are considering is how the remuneration of individuals identified as senior managers will be impacted. The original consultation on SMR and CR was published on the same day as a PRA and FCA consultation on revising existing pay regulation within the UK Remuneration Code. This consultation makes it clear that the expectation should be that there will be more restrictive requirements on pay (most notably longer deferral periods) for senior managers. The Policy Statement confirming the final position on this has not yet been published, but additional requirements on the pay of senior managers (where firms are within the scope of the Remuneration Code) is highly likely. The key unresolved question for firms is what these requirements will be and how they will be communicated to the new senior manager population. At the same time, to the extent that SMR and CR brings new roles and responsibilities for certain employees, firms will need to decide if such changes warrant a review of their pay arrangements.
Undoubtedly the remuneration aspects of SMR and CR are only a very small part of the picture. But we know that pay is a critical and emotional issue for employees. Firms should therefore think carefully of the knock on impact on remuneration and how they will communicate this to their employees.