UK Prudential Regulation Authority And UK Financial Conduct Authority Publish Consultation On Pay For Senior Bankers

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have today set out plans to reduce the restrictions on bonuses of senior bankers.

A joint consultation, published today, proposes several changes to the current senior banker remuneration regime, including:

• Reducing the bonus deferral period for the most senior bankers to five years (down from eight for some) as first announced by Sam Woods at Mansion House in October 2024;
• For other, less senior bankers captured by the regime this will be reduced to four years; and
• Allowing part-payment of bonuses from year one, rather than year three as at present for some bankers.

Sam Woods, Deputy Governor of Prudential Regulation and CEO of the PRA said:

“These proposals on bankers’ bonuses will support UK growth and competitiveness without undermining financial stability. We should not return to the very dangerous pay structures that were commonly in place before 2008, but these proposals will reduce bureaucracy and support responsible risk-taking.”

Sarah Pritchard, Executive Director for Consumers, Competition and International at the FCA, said:

“These important changes will remove unnecessary duplication of rules between the regulators, streamline the remuneration regime for firms, and further strengthen the reputation and competitiveness of the UK banking sector”.

Additional details include:

• Removing EU-originated guidelines that:
  • prohibit paying dividends or interest on deferred bonuses awarded in shares or other instruments; and
  • require senior bankers to wait up to a year before being able to sell deferred bonuses in shares or other instruments.
• Reducing the number of individuals subject to rules on their pay, simplifying the approach for identifying those who should be subject to them, and giving firms more discretion to determine which employees will be subject to the rules.
• Ensuring bankers are held accountable for the outcomes of risk-taking decisions by introducing clarifications to existing policies ensuring that firms consider adjusting pay in the event of risk-management failures.

The consultation seeks to simplify the guidelines around banker bonuses, bringing the UK’s rules more in line with other countries. The proposed periods for deferral of bonuses provide enough time for problems to surface. They should also help to reverse a trend whereby banks have put a higher amount of total financial reward into fixed pay, which is less reactive to shocks, rather than bonuses, which can be adjusted down if events turn out worse than expected.

The proposals simultaneously look to strengthen the link between the actions of senior bankers and their financial rewards, strongly encouraging firms to tie bonuses closer to not just the successes of executives, but also any risk-management failures. The proposals also introduce greater alignment with the Senior Managers Regime, so that firms consider performance against PRA supervisory priorities in the bonus payouts of the responsible Senior Managers. This will complement the proposals in this consultation paper that aim to enhance accountability for risk management failure and risk management outcomes amongst senior staff in firms.

The FCA is proposing to remove several of the remuneration rules from its Handbook where these duplicate requirements in the PRA Rulebook. This will help firms as they will largely only need to refer to one set of remuneration rules.

Background

1. View the full consultation paper.
2. The consultation opens on 26 November 2024, and closes at 11.59pm on 13 March 2025. 
3. At present the maximum deferral period is seven years for higher-paid senior managers, plus a 6 to 12-month retention period (which the PRA proposes to abolish as part of this reform).
4. These changes follow on from a series of announcements over the past year that will boost the competitiveness and growth of the UK financial sector, most notably changes to the Basel 3.1 framework and the introduction of the strong and simple capital regime. The consultation also comes in the wake of 2023’s removal of the banker bonus cap. Since its removal, several firms have started using this new flexibility to announce plans to offer higher bonus ratios, increasing the attractiveness and sensitivity of pay packages to risk outcomes.
5. Read more about the PRA’s secondary competitiveness and growth objective.
6. Read more about the PRA’s rules on remuneration.