The PRA and the FCA have set out their plans to reduce post-crisis restrictions on bonuses of senior bankers. The joint consultation proposals will see the period that bonus payments can be deferred for the most senior bankers reduced from eight years to five years (as first announced by Sam Woods, Deputy Governor of Prudential Regulation and CEO of the PRA, at Mansion House in October 2024).

Less senior bankers, captured by the regime, will have their deferral period reduced to four years, meaning they can receive the money faster. Part-payment of bonuses from year one, rather than year three as at present for some bankers, will also be allowed.

In the US, there are no such restrictions and in the EU, bonuses are deferred for three to five years.

In support of UK Growth

Woods acknowledged that the UK should not want to 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.” Furthermore, he hoped “these proposals on bankers’ bonuses will support UK growth and competitiveness without undermining financial stability.”

This aligns with the UK Chancellor Rachel Reeves, who in her debut Mansion House speech earlier this month said that Crisis era regulation has gone too far and called for regulators to focus on boosting growth.

These plans follow on from a series of announcements over the past year to promote 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 axe 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.

Karl Foster, partner at Spencer West, said: “To some degree, reducing restrictions on bonuses paid to senior bankers is right and to be welcomed. By reducing duplication and reducing the incentive to have a larger element of fixed pay, the changes being consulted on are overdue. 

“But it must be asked: are we strengthening the competitiveness of the City post Brexit, or returning to the excesses of the pre-2008 financial crisis? 

“Only time will tell, but with bonus caps removed, branches closing, a persistent disconnect between mortgage and savings rates and the Bank of England’s base rate, and consumer redress dominating public concerns, one must question whether the intended growth agenda will come to fruition.”

FCA Handbook and SMCR

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 enhance accountability for risk management failure and risk management outcomes amongst senior staff in firms.

The FCA said it 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.

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.”

Risky business

In a press statement, the PRA said it hoped that the proposals will simultaneously look to strengthen the link between the actions of senior bankers and their financial rewards and strongly encourage firms to tie bonuses closer “to not just the successes of executives, but also any risk-management failures.”

The High Pay Centre thinktank expressed concerns about the PRA’s plans and said: “Huge bonuses for bankers impose costs on banks’ clients in the real economy as well as incentivising risky and destabilising behaviour, so excessive pay awards in the financial services industry matter to all of us.

“A deferral period of five years for the most senior banking executives is still a long time to wait so the PRA’s proposals are not unreasonable, but shorter deferral periods should theoretically lead to lower payouts. Bbankers are likely to apply less of a discount to the value of awards they can access sooner, so a smaller bonus deferred for five years has more value as an incentive than a larger one deferred for eight years.

“If this doesn’t reduce the size of payouts, it will be yet another sign of the dysfunctional governance of bankers’ pay and more evidence supporting the case for regulation.”