The end of the bankers' bonus cap in the UK
24 October 2023
The PRA and the FCA has today published a Policy Statement (PRA PS9/23 and FCA PS23/15) confirming the removal of the limits on the ratio between fixed and variable components of total remuneration for dual-regulated firms i.e. removing the bonus cap for banks, building societies and PRA investment firms. This is the long awaited follow up to the joint consultation paper issued by the regulators in December 2022 (PRA CP15/22 and FCA CP22/28).
The bonus cap was first introduced for all large and systemically important CRD-regulated firms in 2014 via the transposition of the European Capital Requirements Directive. UK regulators opposed the bonus cap when it was first proposed as they considered that it put upward pressure on fixed remuneration. The regulators' research has since suggested that firms are indeed opting to increase fixed pay to compensate in-scope individuals as a consequence of the bonus cap constraints.
Under the Policy Statement, the regulators have now confirmed the loosening of the approach to the current bonus cap requirements for banks, in particular through the implementation of changes to the PRA Rulebook (Remuneration Part and the Disclosure (CRR) Part) and to Senior Management Arrangements, Systems and Controls (SYSC) 19D of the FCA Handbook. The changes would also result in updates to the PRA’s Supervisory Statement (SS)2/17 "Remuneration" (see version in force as at 31 October 2023 here).
On timing, the changes will apply to firms' performance years which are ongoing as at the date of implementation i.e. 31 October 2023. However, firms are not expected to resubmit their remuneration policy statements for the ongoing year where they have done so before the date of the publication of the policy statement. The regulators indicate that firms can wait until a later date (e.g. the start of their next performance year) before making any changes.
Nevertheless, there are plenty of remuneration rules that investment firms (and other types of financial services) still have to grapple with, in particular with respect to material risk takers who are subject to payment in kind, deferral, retention and clawback.
In our view, the bonus cap rules were bad regulation from day one. It makes sense to remove them in a post Brexit world. Unfortunately, the FCA/PRA has also created a hideously complicated and jigsaw of remuneration rules since and we now have a position whereby it appears that small investment firms will be in a worse position than certain banks. There is still a long way to run in delivering a sensible remuneration regime if we want the UK to be attractive. Our remuneration rules are the biggest red flag for senior bankers/firms (US and Asian in particular) wanting to establish or work from UK entities.
