Uncertainty in remuneration regulation – the HR norm

By Jon Terry

Over the years, almost all of the conversations I have had with clients on the issue of remuneration regulations have involved “the uncertain”. Since their introduction to the financial services sector, HR professionals have become accustomed to taking decisions in an environment characterised by uncertainty and continuous change. From a remuneration regulatory perspective, the UK vote to leave the EU is likely to lead to a further period of uncertainty and potential regulatory change. But hey, what’s new?!

How the remuneration regulations apply to firms in future depends just as much on the outcome of the exit negotiations as it will on how firms choose to respond to the final agreements. Overlay the political lens of the day and hopefully you will forgive me for saying again that it’s all still very much uncertain. One piece of certainty though - firms should work on the basis that the European remuneration rules will continue to apply until exit. And that is likely to include the European Banking Authority’s (EBA’s) final remuneration guidelines, which come into effect from 1 January 2017.

So where might the negotiations leave us? Here’s my best view of how the different exit outcomes are likely to impact how the rules apply.

UK remains in the EU

While this seems highly unlikely, I include for completeness. Business as usual will be the status quo. European remuneration rules will continue to apply and the UK will have the ability to influence these.

UK leaves the EU but remains in the European Economic Area (EEA)

European remuneration rules have EEA coverage. As such, these will still apply in addition to any future changes to these. Critically, the UK regulator will have no ability to influence these regulations.

UK leaves the EU but negotiates bespoke bilateral agreements

The UK regulators do not need to apply European remuneration rules per se and are unlikely to be able to influence these. For those of you who think this means the end of the bonus cap – the PRA said this was one area of the rules it would look to review upon exit – I’m afraid it may not be as simple as that!

In negotiating access to the EU single market, one of the factors that is likely to be considered by the EU is how ‘equivalent’ the UK regulations are to those in Europe. It’s unclear whether equivalence will mean a full “copy and paste” of all of the European remuneration regulations or not. It is possible that the bonus cap could be one area the EU doesn’t back down on in the negotiations.

Subject to the outcome, UK firms may need to get separate authorisation in all of their EU territories and follow local remuneration rules. The same principle would apply in this case for UK operations of EU firms.

UK reaches no agreement

Two years hard graft results in no agreement. The UK is not required to apply European remuneration rules and has no ability to influence these. UK firms will need to get separate authorisation in all of their EU territories and follow all local remuneration rules. Similarly, the UK rules are likely to apply to the UK operations of EU firms.

Critically, irrespective of the final negotiations, much of the UK rules themselves will remain the same. The UK regulator agrees with the need to regulate remuneration and in a number of areas has gone further than the European equivalent. The only major issue it is less in love with is the bonus cap. But as I’ve said, it is not certain that this will be removed following exit.

HR will need to consider how the different exit outcomes might impact compliance with the remuneration regulations based on their current structure and activities within Europe. At least for now, expect me to leave “the uncertain” as a standing item on the agenda for our meetings over the next couple of years.