On Tuesday, the PRA and the FCA published a Policy Statement (PRA PS9/23 and FCA PS23/15) confirming the removal of the bonus cap for banks, building societies and PRA investment firms from the end of of October. The current rules limit bonuses to 100% of the salary for employees of banks or building societies, or double with shareholder approval.

The European Union introduced the bonus cap for all large and systemically important CRD-regulated firms in 2014, via the transposition of the European Capital Requirements Directive, in response to the 2008 financial crisis. However, other leading financial centres outside the EU did not impose a cap.

Competitiveness and performance

The PRA consulted (PRA CP15/22 and FCA CP22/28) on the bonus cap back in December 2022. Over recent years, the regulators found that “growing evidence has emerged of undesired consequences of the rules on firms’ safety and soundness and UK competitiveness”. In particular, they found this made the UK a less competitive place when it came to attracting top talent.

The PRA said: “The bonus cap has been identified as a factor in limiting labour mobility. The final policy … [removes] this barrier in the UK.”

Ashurst Financial Regulation Practice said: “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.”

The PRA also said that the cap was having the opposite effect to that intended, instead driving up staff salaries that are not linked to the long-term performance of a firm. Employers had less room to vary employee pay due to “material poor performance or misconduct”.

Higher wages therefore cannot be reduced or “clawed back” if a failure or previous misconduct issue later comes to light, it said.

“The size of a bonus is far less important than the behaviour it is based on.”

Ben Blackett-Ord, Executive Chair, Bovill

Many industry leaders are in agreement with the PRA, Ben Blackett-Ord, Founder and Executive Chair at regulatory consultancy Bovill said: “The size of a bonus is far less important than the behaviour it is based on. The ability to claw them back is an incredibly powerful tool, and one that I’d suspect is underutilised.”

Critics including the opposition Labour Party have attacked the decision as being “out of touch” as households struggle with the cost of living crisis. “At a time when millions up and down the country are struggling to make ends meet – this is an insult to working people,” TUC General Secretary Paul Nowak said in a statement.

Ashurst Financial Regulation Practice said it was pleased to see the cap removed. “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 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.”

Rulebook updates

The regulators will implement change through updates to the:

• PRA Rulebook – Remuneration Part and the Disclosure (CRR) Part);
• FCA Handbook – Senior Management Arrangements, Systems and Controls (SYSC) 19D;
• PRA’s Supervisory Statement (SS)2/17 “Remuneration” (version in force as at October 31, 2023).

The changes will apply to firms’ performance years which are ongoing from October 31, 2023. Firms will not be 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 have said that firms can wait until a later date, for example the start of their next performance year, before making changes.