Bankers’ bonus cap lifted: what does it mean for banks?
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In summary, the joint PRA/FCA policy statement, 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), which follows up on their consultation proposals, provides for the following approach:
- The bonus cap, which limits variable pay for material risk takers (MRTs) to 100% (or, with shareholder consent, 200%) of fixed pay, is deleted from the rules with full effect from 31 October 2023 – banks do not need to wait until their next performance year to remove their own cap.
- However, there will 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. There is new guidance on how to go about this. The rules on deferral, payment in instruments, and risk adjustment (including malus and clawback) will continue to apply to any variable pay element.
- As such, the new rules 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.
- In the short term, banks proposing to remove the regulatory cap have some risk analysis and preparatory work to do in order to address the impact for their organisation. This includes considering: (i) their strategy towards shareholders; (ii) the “appropriate” remuneration ratio to be introduced in place of the cap, and whether to adopt different ratios for different categories of staff; (iii) how to unpick role-based allowance structures lawfully; (iv) discrimination and gender pay gap reporting risks in light of the liberalisation of variable pay and potentially bigger bonus awards; and (v) how to manage stakeholder relations.
Commentary, impact and next steps
For our more detailed analysis of the rule changes, their likely impact, and recommended next steps for banks, please access our Briefing.