Recent and Proposed Changes to Regulation of Bankers’ Remuneration in the UK

On 26 November 2024, The UK’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) launched a joint consultation on proposed changes to the remuneration rules for senior bankers in the UK. Key proposals outlined in the consultation include:

• a reduction in the bonus deferral period;
• the faster payment of any bonuses;
• the allowing of dividend/interest payments on deferred bonuses to be awarded in shares; and
• a reduction in the number of individuals subject to certain pay rules.
  

These proposed changes came after comments from Chancellor Rachel Reeves that the UK was an international outlier on deferral arrangements, following the introduction of additional remuneration structures in the aftermath of the 2008 financial crisis. As a result, the UK Government intended to support the PRA in reducing the length of pay deferrals in an effort to help firms attract and retain talent.

However, this is only part of a series of recent changes to the regulations on UK bank remuneration. On 19 December 2022, the Bank of England published a consultation paper (CP15/22), which set out joint proposals by the PRA and the FCA – the key change being the removal of the variable pay cap applicable to material risk takers at certain financial institutions (i.e., the ‘bankers’ bonus cap’).

Following the consultations, a policy statement (PS9/23) was published in October 2023, outlining the final changes and confirming the removal of fixed and variable pay ratio limits. The changes to the policy apply to ongoing performance years from 31 October 2023.

Finally, in September 2024, the PRA published in a “near-final” policy statement a series of changes to the Basel 3.1 framework and the introduction of the “strong and simple” capital regime for smaller companies. Among other things, the changes included lower capital requirements for Small and Medium-sized Enterprises (SMEs).

Overall, one of the central goals of the changes outlined above is a continued effort to improve the UK financial services sector’s competitiveness, which was one of the main themes of the Chancellor’s November 2024 speech at Mansion House. 

Variable to Fixed Remuneration Ratio Limit (the banker’s bonus cap)

In the aftermath of the 2008 global financial crisis, there was widespread public and political outcry over the role of excessive risk-taking by bankers, which was seen as a significant factor contributing to the crisis.

In response, the EU introduced a series of regulatory measures aimed at curbing risk-taking and restoring stability to the financial system. One of the most notable of these was the introduction of the banker’s bonus cap in 2014 under CRD IV. The cap was designed to limit the amount of variable pay that bankers could receive, with the intention of reducing the incentives for excessive risk-taking. Specifically, the cap restricted bonuses to 100% of fixed salary, or up to 200% with explicit shareholder approval. This regulation applied to banks, building societies, and investment firms across the EU, including the UK, which was a Member State at the time.

Following the UK’s departure from the EU, there was a push to reassess and potentially revise various financial regulations inherited from the EU. The banker’s bonus cap was one such regulation that came under close scrutiny. Proponents of removing the cap argued that it placed the UK at a competitive disadvantage compared to other global financial centres, such as New York and Singapore, where no such restrictions exist. In October 2022, then-Chancellor Kwasi Kwarteng announced plans to scrap the bonus cap as part of a broader strategy to make London a more attractive place for financial services and to stimulate economic growth. This decision was part of the controversial 2022 ‘mini-budget’, which faced significant backlash and led to market turmoil, ultimately resulting in Kwarteng’s resignation and subsequently also that of Prime Minister Liz Truss.

Despite the political upheaval, the plan to remove the bonus cap persisted. After a four-month consultation period, the PRA and the FCA confirmed that the bonus cap would be lifted from 31 October 2023. Both regulators cited “unintended consequences” of the cap, which led to such affected financial institutions increasing fixed salaries to compensate for lower bonuses, and reduced flexibility to adjust performance- and risk-related pay. The removal of the bonus cap received a mixed response. Critics feared that it could lead to a return of the excessive risk-taking behaviours that contributed to the 2008 financial crisis. However, the PRA and the FCA have emphasised that other tools, such as bonus deferrals and the implementation of clawback provisions, remain in place to mitigate such risks.

With the removal of the bonus cap in October 2023, previously restricted financial institutions are now free to design their remuneration policies without the restraint of a 2:1 variable-fixed pay cap.

The PRA and FCA’s recent consultation

In November 2024, the most recent joint consultation was launched by the PRA and the FCA, with the intention to garner views on the further reduction of the restrictions on pay for senior bankers. Under the consultation’s proposals, the bonus deferral period for the most senior bankers would be reduced from the current seven years, with an additional six to 12-month retention period, to five years, and for other, less-senior bankers, to four years. Additionally, the consultation suggests allowing the part-payment of bonuses from the first year, rather than only from the third year, as currently required.

The consultation also proposes to remove certain other EU-originated guidelines, such as the prohibition on paying dividends or interest on deferred bonuses awarded in shares or other instruments, and aims to simplify the approach for identifying individuals that are subject to the targeted remuneration rules, giving companies more discretion in determining which employees will be subject to these rules. The PRA and the FCA emphasise that these proposed changes are designed to support UK’s growth and competitiveness without compromising financial stability.

These proposals are part of a broader effort to streamline the remuneration regime for senior bankers, aligning it more closely with international practices. The consultation also seeks to ensure that variable remuneration better reflects risk-taking outcomes and individual performance. Finally, it aims to enhance accountability for risk management failures by introducing clarifications to existing policies, encouraging firms to consider adjusting remuneration outcomes in the event of such failures.

On balance, the consultation represents a continuation of the rationale behind the removal of the banker’s bonus cap in October 2023 – namely to boost the competitiveness and growth of the UK financial sector and align it with the PRA and the FCA’s’ objectives to facilitate international competitiveness and economic growth in the medium to long term.

UK Bankers’ remuneration in 2025 and the future

The PRA and FCA’s current consultation on the remuneration of bankers, and the earlier removal of the bonus cap, represent a significant shift towards a more flexible regulatory environment in the UK. By attempting to reduce bureaucratic constraints and aligning UK practice with other markets outside the EU, the PRA and the FCA intend to foster more risk-taking and enhance the attractiveness of the UK banking sector without compromising financial stability.

Since the cap’s removal, several companies have announced plans to offer higher bonus ratios, in an effort to ensure that overall pay packages are more sensitive to risk outcomes. In addition, some policy renewals that are scheduled to take place during the 2025 AGM season are expected to present new remuneration structures that will largely be reflective of the bonus cap’s removal, with the weighting of such structures being shifted away from fixed pay in favour of variable incentive elements.

The changes proposed in the November 2024 consultation regarding the removal of EU-era banker’s pay restrictions will likely make top bankers’ remuneration packages more appealing. However, the timing is such that they are not expected to filter through to many if any UK bank remuneration policies during the 2025 remuneration policy cycle. Nonetheless, the consultation may prompt discussion between shareholders, remuneration committees, and relevant stakeholders. Under its proposals, simplifying the rules and aligning remuneration policies more closely with non-EU practices will likely reduce administrative burdens for the banks and allow them to focus more on strategic goal setting. In the past, some financial institutions have used the long period of deferral before the shares vest as a reason for variable pay increases, citing the longer vesting period as a method for aligning Executive Director pay with company performance and the overall shareholder experience. With the reduction of the deferral period, such arguments may become no longer relevant.

Should the changes under the new proposals come into force, they may enhance the overall competitiveness of the UK banking sector and the higher pay opportunities available may help attract talent. However, material increases to variable remuneration will likely continue to be scrutinised by many shareholders, and remuneration committees will need to continue to be mindful of the UK Investment Association’s updated Principles of Remuneration and the PRA’s guidance on appropriate fixed and variable pay ratios when reviewing remuneration frameworks. The Chancellor’s November 2024 Mansion House speech may also indicate further changes to banking regulation, with Chancellor Reeves stating that “regulatory changes post-financial crisis created a system which sought to eliminate risk taking ‘that has gone too far’ and led to unintended consequences”. ISS will continue to monitor developments in UK market practice in this area, and remuneration arrangements will continue to be assessed on a case-by-case basis, considering the merits of the explanations provided

By: Martin Lin, UK Research, ISS Governance