The PRA has published a letter in which it states that it has become aware that some firms are uncertain as to the procedure to follow in order to increase the permitted ratio of fixed to variable remuneration above the 1:1 basic limit. The purpose of the letter is to set out the PRA’s view on this matter.
The PRA explains that its rules on this issue are set out in SYSC 19A.3. 44(3), 44A and 44B and are intended to reflect the corresponding provisions of the revised Capital Requirements Directive (CRD IV). The PRA states that the interpretation of the CRD IV is ultimately a matter for the courts and may be the subject of communications by the European Commission and/or the European Banking Authority. However absent such communications, it sets out its views on the relevant issues.
These views include:
- the percentage thresholds referred to in the second indent of Article 94(1)(g)(ii) of CRD IV should all be calculated by reference to the shares or other ownership rights in the firm. This, in turn, should be taken to mean the voting rights capable of being cast on the relevant resolution, which attach to the shares or ownership rights. While the second indent of Article 94(1)(g)(ii) and SYSC 19A.3.44B(5) refer to shareholders, the PRA thinks it is clear that the CRD IV requires the percentages to be counted by reference to share or ownership voting rights, and not the number of individual shareholders or owners;
- the 75% threshold, which applies when fewer than 50% of shares are represented in the vote and the 66% threshold, which applies when at least 50% of shares are represented, are percentages of the share or ownership voting rights represented, not of the firm’s whole issued share capital or ownership rights;
- the PRA discusses the concept of shares or ownership rights being “represented”, which it believes is not clearly defined for the purposes of EU and UK law and may depend on the legal nature of the firm in question;
- the PRA has not ascribed a specific meaning to the word “represented”. Firms should set their own rules as to which forms of conduct will constitute being represented for the purpose of the vote;
- firms should make it clear to shareholders how each form of conduct will be treated for the purpose of being represented;
- it is prudent to proceed on the basis that the meaning of being “represented” is the same for the threshold test (i.e. the 50% test) as for the majority test (i.e. the 66% or 75% test) – even if other interpretations are possible; and
- staff that would be directly affected by the higher maximum levels of variable remuneration would not be allowed to exercise their voting rights in these circumstances. Equally any such voting rights should be disregarded when calculating the percentages.