Remuneration Update – Reimagining the ratio between fixed and variable bank pay

In summary, the joint PRA/FCA consultation paper, directed at banks and other firms subject to the Remuneration Part of the PRA Rulebook and FCA SYSC 19D: Dual-regulated firms Remuneration Code (together, banks), envisages the following approach: 

• The current bonus cap, which limits variable pay for material risk takers (MRTs) to 100% (or, with shareholder consent, 200%) of fixed pay, would be deleted from the rules. However, there would be more focus on the requirement for banks to set an “appropriate” ratio between the fixed and variable components of total remuneration (remuneration ratio) and to adopt the right balance and proportions of fixed and variable pay.  The rules on deferral, payment in instruments, and risk adjustment (including malus and clawback) would continue to apply to any variable pay element.
• As such, the new rules would permit banks to: (i) set their own remuneration ratios for MRTs that fit their business model; and (ii) flex these remuneration ratios to reflect MRTs’ roles and “potential for excessive risk taking”. In practice, this shifts the balance of the obligation to set an appropriate overall mix of pay from the regulators and onto banks. In the longer term, it is clear that UK-based banks will have more freedom to pay MRTs in a manner that suits them, and MRTs may have both more upside and downside pay risk in the future.
• The proposed changes would come into force the next calendar day after the publication of the final policy – anticipated for Q2 2023 – and would apply to firms’ performance year starting after that (likely, for most firms, to be their performance year starting in 2024). Transitional provisions would apply for remuneration awarded in prior financial years.

Commentary, impact and next steps

For our more detailed analysis of the consultation proposals, their likely impact, and recommended next steps for banks, please access our Briefing here.  Banks have until 31 March 2023 to respond to the consultation paper.