In line with their objective to promote competition and growth, the Prudential Regulation Authority and Financial Conduct Authority (the Regulators) have been reviewing remuneration requirements to ensure that they are fit for purpose and do not undermine the UK’s competitiveness.  

Over the years, fixed remuneration had, to some extent, been artificially inflated by firms to address the difficulties created by restrictive variable remuneration requirements. This meant that firms’ fixed costs increased, reducing their ability to adjust costs and absorb losses in a downturn. It also limited the proportion of remuneration that could be performance-based, meaning that good performance could not be fully rewarded (and vice versa – under-performance was potentially being over-rewarded).

Last year, the Regulators scrapped the cap on banker’s bonuses. The cap limited the amount of variable remuneration (such as annual bonuses and long-term incentives) which could be made to material risk-takers to a maximum of 200% of their fixed remuneration (such as salary and benefits). 

The Regulators now plan to reduce restrictions further. In a joint consultation paper, several significant policy reforms have been proposed. Making bonuses more attractive would potentially enable firms to reduce fixed remuneration and boost the UK’s competitiveness.  

We consider the key proposals.  

What are the restrictions on bankers’ bonuses?

As part of the regulatory response to the financial crisis in 2008, firms in the banking sector (and other financial services sectors) have been required to ensure that their remuneration policies and practices promote effective risk management. Amongst other obligations, the PRA and FCA require banks, building societies and designated investment firms to:

• identify staff members whose professional activities may have a material effect on the firm’s risk profile - Material Risk Takers (“MRTs”); and 
• ensure that any variable remuneration paid to MRTs is structured in a certain way under the “pay-out process” rules. The pay out process rules require a percentage of variable remuneration to be deferred, paid in non-cash instruments (which are subject to a further retention period) and adjusted for poor performance. 

You can read more about the current rules here.

What’s being proposed?

Material Risk Takers

Firms must identify their MRTs on an annual basis. Currently, individuals are identified as MRTs by reference to role based (qualitative) or remuneration based (quantitative) criteria. 

The Regulators are proposing to:

• Simplify the MRT identification process. The Regulators consider that the quantitative criteria are not fit for purpose. The Regulators have proposed replacing them with an expectation that an individual who is within the 0.3% of the highest earners of the firm in the preceding financial year is a MRT.  They will also provide additional non-exhaustive examples of roles that can materially affect the risk profile of a firm.  
• Remove the need for Regulator approval. Firms will no longer be required to seek approval from the Regulators if they consider that the activities of an individual who is within the 0.3% of the highest earners in the firm do not have a material effect on the firm’s risk profile. 

However, the proposals also require enhanced governance. The changes shift the responsibility for the identification process onto firms. Firms will need to have adequate and effective controls in place to identify MRTs. Employees with responsibility for the overall management of the risk controls of the firm will need to review the firm’s MRT methodology each year and play a role in identifying MRTs, alongside staff from other functions, such as legal, HR and the firm’s management body. 

Overall these changes significantly simplify the process for identifying MRTs whilst ensuring firms take greater ownership of identifying MRTs in line with the firm’s business model. The changes are also expected to reduce the population of MRTs, assisting in making the regime more proportionate and competitive.

Relaxation of the restrictions on variable remuneration 

To make bonuses more attractive, several changes are proposed for variable remuneration including: 

• Decreasing the number of MRTs whose bonuses are subject to deferral and payment in instruments: Firms will not be required to defer a proportion of a MRT’s variable remuneration or pay a proportion in non-cash instruments if the MRT’s variable remuneration for a performance year is no more than £660,000 and does not exceed more than one third of the MRT’s total remuneration for that performance year. This is a significant increase from the current variable remuneration threshold of no more than £44,000 in a performance year and no more than one third of the MRT’s total remuneration for that year. 
• Simplifying the deferral framework: Proposals include:

• allowing firms to structure variable remuneration so that it vests no faster than on a pro rata basis from the award date (rather than 3 years from the award date). 

• Raising the threshold at which at least 60% of variable remuneration must be subject to deferral from £500,000 to £660,000. 

• Reducing the minimum length of deferral for the most senior MRTs from 7 or 6 years to 5 years and for other, less senior, MRTs from 5 years to 4 years. 

• No longer requiring firms to impose a 6 -12 month retention period on deferred non-cash instruments. 

• Allowing firms to pay dividends or interest on deferred non-cash instruments.

These changes would give firms greater flexibility over their remuneration policies and allow them to move towards having more variable, performance based pay.

Remuneration buy-outs

The FCA is proposing to remove their rules on buy-outs, instead aligning its policy with that of the PRA which includes an exemption for small firms. There are approximately 150 small firms in scope of this rule. Currently small firms must maintain the remuneration structure set out by an MRT’s previous employer, if variable remuneration is bought out as part of an employment offer. 

Unvested remuneration structures at larger firms tend to be more complex and can be costly and complex for small firms to mirror. The simplification may give small firms access to a wider pool of talent.  

Effective risk management 

There are several changes to link the accountability regime more closely to the remuneration regime including: 

• Requiring firms to consider adjusting variable remuneration where it is reasonable to consider that the MRT, because of their role or seniority, could be held responsible for risk events or for failings or weaknesses in relation to risk events.
• Firms will be required to ensure that they identify the full range of individuals who are involved in and/or are accountable for risk events. This will include having more effective systems and controls to be put in place to ensure that senior MRTs’ variable remuneration is adjusted if they have not given the necessary oversight to the individuals they manage or their performance is not in line with the Regulators’ supervisory requirements. 

What do we think?

Overall, these proposals are welcome and will hopefully boost the UK’s competitiveness in the banking sector.  

In several respects the UK’s remuneration requirements are currently more stringent than the requirements of other countries. Although restrictions on variable remuneration have been relaxed, the Regulators have also taken the opportunity to seek to strengthen the accountability of firms and MRTs.  

Streamlining the complex rules should support firms in the long run, although firms will have a significant amount of work to prepare for any changes. In particular, firms will need to ensure that their processes to identify MRTs and MRTs who are accountable for material failures of risk management are compliant and robust. 

The consultation opened on 26 November 2024 and closes on 13 March 2025.