Response to consultation on Guidelines on sound remuneration policies
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The Paragon Group of Companies PLC (‘PGC’) is the holding company at the top of a UK consolidated group (the ‘Group’) that has a number of wholly owned subsidiaries performing core functions. One of these subsidiaries is the Bank and it is only this subsidiary that is subject to CRD IV. As the banking subsidiary of the Group, the Bank is authorised by the Prudential Regulation Authority (‘PRA’) and regulated the Financial Conduct Authority (‘FCA’) and PRA. The Bank is also covered by the Financial Services Compensation Scheme. The Bank’s corporate structure is an unusual one and does not easily align itself to the assumed structures set out within CRD IV, nor the EBA draft guidelines.
Since exiting the market place as an originator of consumer finance in 2008, the Group has been active in acquiring and servicing portfolios and has continued to monitor developments in relevant markets identifying a consolidation of market participants and an associated reduction in competition. Following a strategic review in 2013, the Group concluded that re-entry into household and small to medium enterprises (‘SME’) markets directly linked to its core competencies and experience would provide significant benefits for the Group, the markets, shareholders of PGC and the relevant customer base. In order to re-enter these markets, the Group needed to secure a stable funding proposition.
The strategic review concluded the most appropriate and sustainable long term option would be provided by a diversified funding structure with retail deposits at its heart and the Group identified that the formation of a bank would be the most suitable vehicle to underpin a robust and sustainable business model for delivering consumer finance lending. The bank would sit alongside the other core entities within the Group, being fully capitalised by the Group holding company. The Bank was launched in February 2014 and its strategy involves utilising the skills, infrastructure and capital of the Group in a manner that delivers prudent, profitable and sustainable growth in its chosen target markets. The Bank believes it provides consumers with a competitive alternative to the large, established banks in the UK and the Group has been encouraged by the positive response from its customers and its institutional shareholders to its strategic contribution within the “challenger bank” community.
In summary, the Bank is the authorised subsidiary of the Group, which is not itself subject to CRD IV remuneration requirements. The Bank seeks clarity on the wording within these proposed guidelines and refers to the public hearing on 8 May and specifically slide 7 from 11 regarding the application of the remuneration requirements in a group context. This slide provides clarity for the Bank in relation to the legal structure of the parent company and the Bank suggests specific wording is included within section 7 of the proposed guidelines, to provide for the Bank’s unique structure and relationship to its parent company.
In the event ‘neutralisations’ were removed; the additional hours and administrative cost for monitoring and governance requirements would be considerable in terms of amending policy documents, discussing and taking the minutes of governance committee meetings, auditing requirements, additional conversations with shareholders and additional dialogue in the annual report and accounts. Specific cost estimates for this approach are provided in more detail in response to question 22. In addition, the total remuneration for any of the executive directors, or any other staff members of the Bank, falls some way below levels that would classify individuals as high earners. There are 60 employees that would require monitoring and a review of the value of their total remuneration packages confirms none would be above the required reporting threshold.
The monitoring that would be required if neutralisations were removed would be extensive and disproportionate to the variable pay potential earnings. The removal of the minimum compensation rule would force a number of individuals with low variable remuneration to be caught within the scope of CRD IV pay-out process requirements, e.g. deferral. This may lead to the application of the rules on variable pay to very small bonuses, which would be impractical, make these roles less attractive and have a disproportionately high administration cost for reporting purposes. The Bank therefore strongly supports retaining the minimum compensation approach to the application of CRD.
The Bank urges the EBA to reconsider its proposed position on proportionality and recommends ‘neutralisations’ remain in place as long as the Group can demonstrate sound remuneration principles, complies with the required level of reporting and obtains shareholder approval for the Group’s remuneration policy and application at regular intervals, i.e. every 3 years as currently carried out.
This is common practice in the UK for performance share plans as dividend equivalents are considered fair and reasonable to promote the long-term stability and performance of the company and have the support from the UK shareholder base, which like: the upfront knowledge of the measures being in place. Senior management are encouraged to align the business strategy to long-term growth and the Group and the Bank want to continue to use these variable remuneration instruments.
If the use of dividend equivalents is removed, it would prove challenging to manage those awards already “in flight” and so the Bank suggests this option is retained for both existing and future grants.
Fixed costs will rise generally as the restrictions will reduce the size of variable compensation. This will impose a greater burden on the Bank and generally for the industry, especially start-up banks which will need to attract talent away from established organisations. The impact will be to the detriment of the competitive environment and ultimately customers.
The cost estimates and additional man hours required to process the changes on proportionality alone are as follows:
Task, Estimated internal man hours, Estimated internal cost, Estimated external advisor costs
Internal review and redrafting of current policy, 40, £5,200,
External review of revised policy, 15, , £8,000
Remuneration Committee approval of revised policy, 8, £10,000,
Shareholder governance meetings to discuss proposed policy changes, 100, £36,000,
AGM resolution draft and internal review to seek shareholder approval for revised policy, 40, £38,500, £10,000
Identification of affected employees and a review of existing remuneration packages, 40, £13,500,
Options for restructuring existing remuneration packages, 20, £11,800,
Employment law advice on amendments to contract, 15, , £5,000
Remuneration advisor advice on options and next steps, 15, , £5,000
Consultation with affected employees, 70, £18,000,
Shareholder governance meetings to discuss proposed policy changes, 100, £36,000,
AGM resolution draft and internal review to seek shareholder approval for revised policy, 40, £38,500, £10,000
Identification of affected employees and a review of existing remuneration packages, 40, £13,500,
Options for restructuring existing remuneration packages, 20, £11,800,
Employment law advice on amendments to contract, 15, , £5,000
Remuneration advisor advice on options and next steps, 15, , £5,000
Consultation with affected employees, 70, £18,000,
This equates to an estimated total of just over 360 internal man hours @ £133,000 and an external advisor cost of c. £28,000 to deal with the removal of neutralisations.
In addition, the estimated costs for implementing the other key changes around ongoing shareholder approval for the variable bonus cap, extending the deferral and retention periods, applying malus and clawback, identifying Material Risk Takers (‘MRT’) and managing the increased level of disclosure using the same approach as outlined above for the proportionality point has an estimated total of 300 internal man hours @ £85,000 and an external advisor cost of c. £40,000.
Ongoing costs around additional disclosure, governance of the MRT, and AGM preparations and approvals has an estimated total of 200 hours per annum @ £20,000.
Finally, it is highly likely additional specialist headcount will need to be recruited into the HR function namely someone with specialist compensation and benefits knowledge and experience of regulatory remuneration, to manage the ongoing requirements from these proposed guidelines, to ensure compliance and to ensure remuneration packages remain as competitive as possible for retention purposes. The Group operates with a low cost:income base of around 30% because of its organisational structure and it prides itself on managing its fixed costs efficiently to benefit its product pricing, customers and shareholders. The estimated cost for additional headcount is c. £65,000 pa with an initial recruitment cost of £15,000.
The Group and the Bank views all these costs as unnecessary and disproportionate considering the size of the organisation and the actual value of the individuals’ remuneration packages.
Q 2: Are the guidelines in chapter 5 appropriate and sufficiently clear?
No commentQ 3: Are the guidelines regarding the shareholders’ involvement in setting higher ratios for variable remuneration sufficiently clear?
The Bank seeks clarification as to the frequency of shareholders’ involvement in approving higher ratios for variable remuneration. Due to the cost and limited benefit of seeking annual approval, the Bank suggests that this would only need to be sought once, or if it needs to be periodically refreshed, approval should be sought every three to five years.Q 4: Are the guidelines regarding remuneration policies and group context appropriate and sufficiently clear?
No. The guidelines propose to apply the specific requirements of CRD IV to the entire remuneration of Material Risk Takers (‘MRTs’), even where part of the activities of these staff relates to non-CRD IV activities.The Paragon Group of Companies PLC (‘PGC’) is the holding company at the top of a UK consolidated group (the ‘Group’) that has a number of wholly owned subsidiaries performing core functions. One of these subsidiaries is the Bank and it is only this subsidiary that is subject to CRD IV. As the banking subsidiary of the Group, the Bank is authorised by the Prudential Regulation Authority (‘PRA’) and regulated the Financial Conduct Authority (‘FCA’) and PRA. The Bank is also covered by the Financial Services Compensation Scheme. The Bank’s corporate structure is an unusual one and does not easily align itself to the assumed structures set out within CRD IV, nor the EBA draft guidelines.
Since exiting the market place as an originator of consumer finance in 2008, the Group has been active in acquiring and servicing portfolios and has continued to monitor developments in relevant markets identifying a consolidation of market participants and an associated reduction in competition. Following a strategic review in 2013, the Group concluded that re-entry into household and small to medium enterprises (‘SME’) markets directly linked to its core competencies and experience would provide significant benefits for the Group, the markets, shareholders of PGC and the relevant customer base. In order to re-enter these markets, the Group needed to secure a stable funding proposition.
The strategic review concluded the most appropriate and sustainable long term option would be provided by a diversified funding structure with retail deposits at its heart and the Group identified that the formation of a bank would be the most suitable vehicle to underpin a robust and sustainable business model for delivering consumer finance lending. The bank would sit alongside the other core entities within the Group, being fully capitalised by the Group holding company. The Bank was launched in February 2014 and its strategy involves utilising the skills, infrastructure and capital of the Group in a manner that delivers prudent, profitable and sustainable growth in its chosen target markets. The Bank believes it provides consumers with a competitive alternative to the large, established banks in the UK and the Group has been encouraged by the positive response from its customers and its institutional shareholders to its strategic contribution within the “challenger bank” community.
In summary, the Bank is the authorised subsidiary of the Group, which is not itself subject to CRD IV remuneration requirements. The Bank seeks clarity on the wording within these proposed guidelines and refers to the public hearing on 8 May and specifically slide 7 from 11 regarding the application of the remuneration requirements in a group context. This slide provides clarity for the Bank in relation to the legal structure of the parent company and the Bank suggests specific wording is included within section 7 of the proposed guidelines, to provide for the Bank’s unique structure and relationship to its parent company.
Q 5: All respondents are welcome to provide their comments on the chapter on proportionality, with particular reference to the change of the approach on ‘neutralisations’ that was required following the interpretation of the wording of the CRD. In particular institutions that used ‘neutralisations’ under the previous guidelines for the whole institution or identified staff receiving only a low amount of variable remuneration are asked to provide an estimate of the implementation costs in absolute and relative terms and to point to impediments resulting from their nature, including their legal form, if they were required to apply, for the variable remuneration of identified staff: a) deferral arrangements, b) the pay out in instruments and, c) malus (with respect to the deferred variable remuneration). In addition those institutions are welcome to explain the anticipated changes to the remuneration policy which will need to be made to comply with all requirements. Wherever possible the estimated impact and costs should be quantified, supported by a short explanation of the methodology applied for their estimation and provided separately for the three listed aspects.
The Bank supports the proportionality principle and the objectives of the obligations, however, disagrees with the practicality of removing the ‘neutralisations’ applied under the previous guidelines. The size of the business means it is currently able to disapply the pay-out requirements as a tier 3 firm (the lowest proportionality tier in the UK). From launch in February 2014, the Bank has originated £85.6 million of loans and raised £165.0 million retail deposits. It employs 60 people and there is already PGC shareholder approval in place to apply the ratio between the variable components of remuneration and the fixed components to 200%. This is only applicable to one executive director role for the Bank, out of necessity, due to the remuneration structure of the package. Neutralisation means the Bank has the flexibility with remuneration structures to compete in the current market, to provide packages required to recruit and retain the best skills and experience to benefit its customers and employees, as well as the Group’s shareholders.In the event ‘neutralisations’ were removed; the additional hours and administrative cost for monitoring and governance requirements would be considerable in terms of amending policy documents, discussing and taking the minutes of governance committee meetings, auditing requirements, additional conversations with shareholders and additional dialogue in the annual report and accounts. Specific cost estimates for this approach are provided in more detail in response to question 22. In addition, the total remuneration for any of the executive directors, or any other staff members of the Bank, falls some way below levels that would classify individuals as high earners. There are 60 employees that would require monitoring and a review of the value of their total remuneration packages confirms none would be above the required reporting threshold.
The monitoring that would be required if neutralisations were removed would be extensive and disproportionate to the variable pay potential earnings. The removal of the minimum compensation rule would force a number of individuals with low variable remuneration to be caught within the scope of CRD IV pay-out process requirements, e.g. deferral. This may lead to the application of the rules on variable pay to very small bonuses, which would be impractical, make these roles less attractive and have a disproportionately high administration cost for reporting purposes. The Bank therefore strongly supports retaining the minimum compensation approach to the application of CRD.
The Bank urges the EBA to reconsider its proposed position on proportionality and recommends ‘neutralisations’ remain in place as long as the Group can demonstrate sound remuneration principles, complies with the required level of reporting and obtains shareholder approval for the Group’s remuneration policy and application at regular intervals, i.e. every 3 years as currently carried out.
Q 6: Are the guidelines on the identification of staff appropriate and sufficiently clear?
No commentQ 7: Are the guidelines regarding the capital base appropriate and sufficiently clear?
No commentQ 8: Are the requirements regarding categories of remuneration appropriate and sufficiently clear?
No commentQ 9: Are the requirements regarding allowances appropriate and sufficiently clear?
No commentQ 10: Are the requirements on the retention bonus appropriate a sufficiently clear?
No commentQ 11: Are the provisions regarding severance payments appropriate and sufficiently clear?
No commentQ 12: Are the provisions on personal hedging and circumvention appropriate and sufficiently clear?
No commentQ 13: Are the requirements on remuneration policies in section 15 appropriate and sufficiently clear?
No commentQ 14: Are the requirements on the risk alignment process appropriate and sufficiently clear?
No commentQ 15: Are the provisions on deferral appropriate and sufficiently clear?
No commentQ 16: Are the provisions on the award of variable remuneration in instruments appropriate and sufficiently clear? Listed institutions are asked to provide an estimate of the impact and costs that would be created due to the requirement that under Article 94(1)(l)(i) CRD only shares (and no share linked instruments) should be used in parallel, where possible, to instruments as set out in the RTS on instruments. Wherever possible the estimated impact and costs should be quantified and supported by a short explanation of the methodology applied for their estimation.
The Group currently uses share based awards with dividend equivalents as a variable remuneration instrument for all eligible employees, including those employed by the Bank since its launch in 2014.This is common practice in the UK for performance share plans as dividend equivalents are considered fair and reasonable to promote the long-term stability and performance of the company and have the support from the UK shareholder base, which like: the upfront knowledge of the measures being in place. Senior management are encouraged to align the business strategy to long-term growth and the Group and the Bank want to continue to use these variable remuneration instruments.
If the use of dividend equivalents is removed, it would prove challenging to manage those awards already “in flight” and so the Bank suggests this option is retained for both existing and future grants.
Q 17: Are the requirements regarding the retention policy appropriate and sufficiently clear?
No commentQ 18: Are the requirements on the ex post risk adjustments appropriate and sufficiently clear?
No commentQ 19: Are the requirements in Title V sufficiently clear and appropriate?
No commentQ 20: Are the requirements in Title VI appropriate and sufficiently clear?
No commentQ 21: Do institutions, considering the baseline scenario, agree with the impact assessment and its conclusions?
No commentQ 22: Institutions are welcome to provide costs estimates with regarding the costs which will be triggered for the implementation of these guidelines. When providing these estimates, institutions should not take into account costs which are encountered by the CRD IV provisions itself.
Cost estimates for implementing the guidelines as proposed are considerable, not only for one-off costs to review and restructure remuneration policies and practices, but also for ongoing monitoring costs. The estimated implementation costs equate to over £4,500 per Bank employee, with an ongoing cost of £1,500 per Bank employee, which highlights the additional burden the Bank will have to carry due to the proposed loss of proportionality.Fixed costs will rise generally as the restrictions will reduce the size of variable compensation. This will impose a greater burden on the Bank and generally for the industry, especially start-up banks which will need to attract talent away from established organisations. The impact will be to the detriment of the competitive environment and ultimately customers.
The cost estimates and additional man hours required to process the changes on proportionality alone are as follows:
Task, Estimated internal man hours, Estimated internal cost, Estimated external advisor costs
Internal review and redrafting of current policy, 40, £5,200,
External review of revised policy, 15, , £8,000
Remuneration Committee approval of revised policy, 8, £10,000,
Shareholder governance meetings to discuss proposed policy changes, 100, £36,000,
AGM resolution draft and internal review to seek shareholder approval for revised policy, 40, £38,500, £10,000
Identification of affected employees and a review of existing remuneration packages, 40, £13,500,
Options for restructuring existing remuneration packages, 20, £11,800,
Employment law advice on amendments to contract, 15, , £5,000
Remuneration advisor advice on options and next steps, 15, , £5,000
Consultation with affected employees, 70, £18,000,
Shareholder governance meetings to discuss proposed policy changes, 100, £36,000,
AGM resolution draft and internal review to seek shareholder approval for revised policy, 40, £38,500, £10,000
Identification of affected employees and a review of existing remuneration packages, 40, £13,500,
Options for restructuring existing remuneration packages, 20, £11,800,
Employment law advice on amendments to contract, 15, , £5,000
Remuneration advisor advice on options and next steps, 15, , £5,000
Consultation with affected employees, 70, £18,000,
This equates to an estimated total of just over 360 internal man hours @ £133,000 and an external advisor cost of c. £28,000 to deal with the removal of neutralisations.
In addition, the estimated costs for implementing the other key changes around ongoing shareholder approval for the variable bonus cap, extending the deferral and retention periods, applying malus and clawback, identifying Material Risk Takers (‘MRT’) and managing the increased level of disclosure using the same approach as outlined above for the proportionality point has an estimated total of 300 internal man hours @ £85,000 and an external advisor cost of c. £40,000.
Ongoing costs around additional disclosure, governance of the MRT, and AGM preparations and approvals has an estimated total of 200 hours per annum @ £20,000.
Finally, it is highly likely additional specialist headcount will need to be recruited into the HR function namely someone with specialist compensation and benefits knowledge and experience of regulatory remuneration, to manage the ongoing requirements from these proposed guidelines, to ensure compliance and to ensure remuneration packages remain as competitive as possible for retention purposes. The Group operates with a low cost:income base of around 30% because of its organisational structure and it prides itself on managing its fixed costs efficiently to benefit its product pricing, customers and shareholders. The estimated cost for additional headcount is c. £65,000 pa with an initial recruitment cost of £15,000.
The Group and the Bank views all these costs as unnecessary and disproportionate considering the size of the organisation and the actual value of the individuals’ remuneration packages.