Tapestry Alert: UK - PRA Consults on Remuneration Regulations for Solvency II Firms

 
April 2016

Dear Client,

The UK’s Prudential Regulation Authority (‘PRA’) had informal discussions with the insurance sector last year and has now issued a consultation paper (CP13/16) which seeks feedback on a draft supervisory statement concerning the application of Solvency II remuneration requirements.

Who does the Supervisory Statement apply to?

This is relevant to all insurance and reinsurance firms and groups doing business in the UK who are within the scope of Solvency II, including the Society of Lloyd’s and managing agents.

The PRA expects non-EEA entities of UK Solvency II group firms, as well as UK branches of non-EEA insurers and reinsurers, to take account of the expectations set out in the supervisory statement.

What are the timings?

Responses to the consultation are due by Thursday, 2 June 2016.

Background

As part of this legislative package for the insurance sector, the EU published the Solvency II Delegated Regulation ((EU) 2015/36) (the ‘Regulation’) which became directly applicable to Solvency II firms from 1 January 2016 (accessible here). Article 275 of the Regulation sets out requirements as to the Remuneration Policy of insurance and reinsurance undertakings, and includes, amongst other points:

• Requirement for a remuneration committee;
• Deferral for at least 3 years;
• Restrictions / conditions surrounding the choice of performance criteria;
• Provisions regarding termination payments;
• Restrictions on personal hedging strategies and remuneration and liability-related insurance.

Consultation

The consultation seeks feedback on a draft supervisory statement which sets out the PRA’s expectations in relation to some of the remuneration provisions found in article 275 of the Regulation and focusses on:

1. Identification of Solvency II staff:
   
   In addition to setting out who will be ‘Solvency II staff’, the supervisory statement gives guidance on who is an MRT. This guidance gives some qualitative criteria but contains much less detail than the Regulatory Technical Standards used to identify MRTs in CRD IV regulated firms.
    
2. Deferral:
   
   Unlike CRD IV, article 275 does not specify a minimum percentage of variable remuneration that must be deferred. However, the PRA suggests that a minimum of 40% of variable remuneration must be deferred. The deferral period, like CRD IV, must be for a minimum period of three years. However, unlike CRD IV, there is no reference to a minimum of 3 to 5 years. 
    
3. Malus:
   
   Article 275 specifies that variable remuneration should be subject to a downwards adjustment but does not specifically require malus. However, the PRA has stated that firms should ensure that they are able to apply malus during the three year deferral period.
    
4. Performance measurement:
   
   Like CRD IV, performance measurement should be based on a balanced scorecard comprising of financial and non-financial criterial, and total variable remuneration must be based on a combination of both individual, business unit, and group performance.
    
5. Disclosure:
   
   The draft supervisory statement was accompanied by draft remuneration policy statement (‘RPS’) templates for PRA-regulated Category 1 and 2 Solvency firms. These templates will become available on the Bank of England’s website for firms to download and submit once the statement has been finalised.  However, use of a template is not mandatory. 

Proportionality

The PRA expects that the guidance, once finalised, will create a broadly consistent approach to implementation of the Regulation across all affected firms. However, the PRA will allow different outcomes to be reached due to the application of proportionality, that is, due to differences in the "internal organisation of the insurance or reinsurance undertaking, and the nature, scale and complexity of the risks inherent in its business."

Tapestry’s comment:
Most insurance firms have been moving forward to comply, broadly, with the Solvency II requirements.   We think the supervisory guidance will help firms to identify the practice expected of them.  The PRA’s approach to issue supervisory statements rather more hard-wired regulation is also help to the industry. 

Firms will welcome the PRA’s approach to proportionality. The PRA has stated that it is appropriate to limit the application of the minimum expectations set out in the draft supervisory statement to significant firms only, that is, Category 1 and 2 PRA-regulated firms. The PRA has also stated that for UK banking and asset management entities (subject to CRD, AIFMD and UCITS V), the de minimis exemption can apply to disapply the deferral requirement where individuals have total remuneration of no more than GBP500,000 and where variable remuneration consists of no more than 33% of their total remuneration.

It is also worth noting that the draft supervisory statement reflects the PRA's current expectations, but these are subject to change. They may change as a result of the consultation process and/or when the Senior Managers and Certification Regime is extended to insurers. However, the PRA will consult before doing this.

If you have any questions on this or remuneration regulations generally, please do contact us – we are happy to help.

Janet and Matthew

        
Janet Cooper               Matthew Hunter