On 10 February 2023, the PRA published Policy Statement 1/23 ‘Remuneration: Unvested pay, Material Risk Takers and public appointments’ (PS1/23).

PS1/23 is relevant to PRA authorised banks, building societies, PRA-designated investment firms, including third country branches, that are subject to the Remuneration Part of the PRA Rulebook. In PS1/23 the PRA provides feedback to the responses to its earlier consultation (Consultation Paper 8/22 ‘Remuneration: Unvested pay, Material Risk Takers and public appointments’ (CP8/22)) and sets out its final policy in the form of an updated version of Supervisory Statement 2/17 – ‘Remuneration’ (SS2/17).

In summary, in CP8/22 the PRA proposed a new chapter 4 of SS2/17 covering changes to the instruments or claims that comprise unvested, deferred sums awarded to material risk takers (MRTs) as part of their variable pay. Specifically the PRA proposed that:

• In general, unvested, deferred claims that comprise the variable pay of MRTs should not be converted from an equity claim into a claim on other instruments (or vice versa) after an award has been made.
• This expectation should apply to all unvested, deferred sums, and not exclude amounts above the regulatory minima.
• In exceptional circumstances, such as where there are potential conflicts of interest arising from a (proposed) public-sector appointment that cannot otherwise be sufficiently mitigated, it may be appropriate for a conversion to occur subject to the prior non-objection of the PRA, and on the basis that the relevant retention requirements remain unchanged.

Furthermore, the PRA proposed that SS2/17 be amended to outline the circumstances in which it considers it more likely a waiver or modification to the relevant remuneration rules would meet the statutory test under the Financial Services and Markets Act 2000, where, in wholly exceptional circumstances, an adjustment is sought in relation to a public sector appointment with a view to converting an award comprising equity or other instruments to a cash sum.

In PS1/23 the PRA reports that most respondents welcomed the proposals and is proceeding with them. However, the PRA has made certain modifications to the text of the updated version of SS2/17 in order to provide further clarity. For example, it has added a footnote (number 19) noting that there may, on occasion, be circumstances other than public appointments where a conversion is appropriate. The PRA has also added a line (paragraph 4A.11) to state that in the event of a conflict of interest arising from a public appointment due to instruments being held during a retention period, the onus should be on a public sector employer to determine whether (or not) its conflicts of interest policy is able to address any conflicts.

In terms of feedback, among other things, the PRA mentions that one respondent noted that firms would require rigorous systems and processes to be able to meet the expectation of making conversions between instruments, or to achieve the circumstances in which a waiver or modification is more likely to be granted. The PRA agrees there are system and administrative implications for those firms that wish to undertake the conversion of unvested, deferred pay from one form into another. However, the PRA is not creating an expectation that firms should undertake conversions for a particular reason. It is for firms to judge whether they wish to do this, and approach the PRA to obtain either its non-objection, or to apply for a waiver or modification.

The new policy takes effect on 10 February 2023.