Financial Services

CRD V - Recent changes to the Remuneration Code

Published on 31st Mar 2021

As one of the last pieces of EU law the UK was subject to before it left the single market, the Capital Requirements Directive V (EU) 2019/878 (CRD V) makes a number of changes to the Remuneration (Rem) Code for UK banks and designated (that is, dual regulated) investment firms.


The most significant changes are in respect of scope and proportionality; not only have the categories of material risk takers (MRTs) been expanded, but the disapplication of Rem Code provisions on grounds of proportionality has been substantially restricted. This means many firms and employees are now subject to additional remuneration rules.

We take a look at some of the crucial changes for firms.


  • Revised qualitative and quantitative tests for MRTs.
  • Firms cannot deem employees who only meet the quantitative tests not to be MRTs without regulatory approval.
  • Disapplication of certain Rem Code provisions on grounds of proportionality has been restricted.
  • The minimum deferral period for variable remuneration has increased to 4 years.
  • Listed firms can now include share-linked instruments in their remuneration packages.

Material risk takers

The Rem Code applies to employees who are MRTs. Under previous rules, MRTs comprised of employees whose professional activities had a material impact on the firm’s risk profile. Employees were deemed to be MRTs if they met any number of qualitative or quantitative criteria set out in Commission Delegated Regulation (EU) No 604/2014 (MRT Regulation 2014). In limited circumstances, firms could decide that individuals meeting just the quantitative tests under the MRT Regulation 2014 were not MRTs.

The new Rem Code retains a revised list of qualitative and quantitative criteria for identifying MRTs (currently set out in draft regulatory technical standards from the European Banking Authority), and also introduces a new list of roles that are deemed to be MRTs:

  • members of the senior management or management body;
  • employees with managerial responsibility over the firm’s control functions or material business units;
  • employees entitled to significant remuneration in the preceding financial year, for which three conditions must be met:
    • the individual's remuneration is at least £440,000;
    • the individual's remuneration is at least the average remuneration awarded to the members of the firm’s management body and senior management; and
    • the individual performs their professional activity within a material business unit and the activity is of a kind that has a significant impact on the relevant business unit’s risk profile.

The qualitative and quantitative tests in the MRT Regulation 2020 are broadly similar to existing ones, although firms will need to go through a careful mapping exercise as there are differences. Notably, firms must now seek approval from the PRA before excluding employees that only meet the quantitative tests, and exclusion for employees earning more than €1m will only be granted under "exceptional circumstances". In reality, these differences are likely to result in more individuals being identified as MRTs.


Under previous rules, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) divided firms into three categories to apply the Rem Code on a proportionate basis, with many of the rules disapplied for Level Three Firms.  Furthermore, individuals who earned less than £500,000 and whose variable remuneration did not exceed 33% of the total were exempted from certain provisions.

CRD V removed the UK's discretion on how to apply the remuneration code proportionally.  Instead, only certain prescribed provisions of the Rem Code can be disapplied for:

  • firms that are not "large institutions" and whose average value of assets does not exceed £4 billion over the four-year period preceding the current financial year (although the threshold increases to £13 billion if certain conditions are met – see below); or
  • staff whose annual variable remuneration does not exceed £44,000 and does not represent more than one third of their total annual remuneration.

Large Institutions

A firm is a "large institution" if it is:

  • a global systemically important institution or other systemically important institution; or
  • one of the three largest institutions in the UK in terms of total value of assets; or
  • an institution with total assets (calculated either on an individual or a consolidated basis) equal to or greater than €30bn.

Conditions for applying higher £13m threshold 

Both the FCA and PRA have used their discretion under CRDV to increase the proportionality threshold to €15m (or £13m) for firms that meet additional conditions.  These conditions are:

  • the firm has no obligations, and is not subject to simplified obligations, for recovery and resolution planning purposes under the Bank Recovery and Resolution Directive;
  • the firm has a small trading book (that is, its traded business does not exceed 5% its total assets and is less than €50m);
  • the firm has traded derivatives positions that do not exceed 2% of its total on- and off-balance sheet assets, and the total value of its overall derivatives positions do not exceed 5%; and
  • it is appropriate for the firm not to be exempted from certain provisions, taking into account the nature, scope, and complexity of its activities, its internal organisation and, if applicable, the characteristics of the group to which it belong. (In this respect, both the PRA and FCA have retained the principle that below-threshold firms in a group containing above threshold firms are deemed to be above threshold).

Accordingly, many firms and individuals that were previously exempt from certain Rem Code provisions on proportionality grounds are now subject to its full effect.

Even for those firms or employees who satisfy the new proportionality thresholds, a much more limited selection of Rem Code provisions are disapplied – those regarding payments in instruments, deferral and discretionary pension benefits.

As such, previously "level three firms" are now subject to the variable pay cap, the prohibition on guaranteed variable remuneration; malus and clawback provisions and the requirements covering buy-outs of variable remuneration. Similarly, all individual MRTs (regardless of their income) are now subject to requirements on guaranteed variable remuneration, malus and clawback.

Deferral of bonuses

Under previous rules, at least 40% of variable remuneration for MRTs had to be subject to a minimum deferral period of three, five, or seven years, depending on an employee’s role and seniority.  Firms could disapply deferral rules for individuals earning no more than £500,000 (of which not more than 33% is variable), though as noted, this proportionality threshold has now reduced to £44,000, so more employees will be subject to deferral.

The new Rem Code increases the minimum deferral period to four years for anyone earning less than £500,000, although the deferral period must be at least five years for senior management. This four-year period should capture the majority of employees who are subject to deferral for the first time following changes to proportionality thresholds.

Payment in instruments

Whereas CRD IV only allowed unlisted firms to include share linked instruments in their variable remuneration, the new Rem Code extends this to listed firms.

Solo-regulated investment firms 

Solo regulated investment firms are unaffected by the changes to CRD V, as the EU's remuneration proposals for Markets in Financial Instruments Directive investment firms are contained in the new Investment Firms Directive and Investment Firms Regulation. Following Brexit, these do not need to be transposed by the UK, although the FCA has consulted on implementing a similar regime to minimise regulatory divergence. See our Insight on this here.

Osborne Clarke comment

Given all of the preparations required from firms in the run up to Brexit, changes to the Rem Code at the end of last year may have creeped under the radar. On a rule by rule basis, there is not a significant change from the earlier regime except for proportionality thresholds and exemptions, which will extend more Rem Code provisions to more firms and individuals. Even firms who are used to applying the full Rem Code will need to refresh their policies and procedures, and in particular their classification of MRTs, to ensure they are up to date. Whether we'll see a divergence from CRDV in the future is an open question, though recent noises have suggested the UK will resist being a rule taker in return for equivalence recognition from the EU. In that respect, the UK has always been sceptical of certain restrictions in the Rem Code.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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