On 27 February 2023, the PRA published Consultation Paper 5/23 ‘Remuneration: Enhancing proportionality for small firms’ (CP5/23).

Introduction

CP5/23 sets out the PRA’s proposals to enhance the proportionality of its remuneration requirements which apply to small Capital Requirements Regulation (CRR) firms and small third country CRR firms.

The PRA’s current approach to applying the remuneration regime for small firms was introduced in 2020 following the implementation of the EU’s Capital Requirements Directive V (CRD V). Under both the CRD V and the preceding CRD IV regime, small firms are subject to less strict remuneration requirements than larger firms. However, since the implementation of the CRD V, the PRA has seen increasing evidence that the regime has been costly or burdensome for some small firms, including through waiver applications and firms’ responses to a survey. CP5/23 therefore sets out proposals to amend the requirements and supervisory expectations to reflect this evidence and to enhance the proportionality of the regime for small firms.

Proposals

The PRA’s proposals aim to increase the proportionality of the remuneration regime by reducing the regulatory burden on small firms to a level more appropriate to the benefits arising from lowering risks to these firms’ safety and soundness and to the UK financial system. The PRA considers that risks to safety and soundness for these small firms can be mitigated sufficiently by other remuneration rules that it is not proposing to modify.

The policy proposals in CP5/23 would:

• define small firms in line with the proposed Simpler-regime size threshold, and with reference to selected other Simpler-regime criteria under the ‘Strong and Simple’ framework;
• remove the requirement for small firms to apply rules on malus, clawback and buyouts; and
• provide clarity on how disclosure requirements apply for all proportionality levels.

Next steps

The deadline for responses to CP5/23 is 30 May 2023.