FCA/PRA Consultation launched on scrapping the bankers’ bonus cap

Following the Government’s announcement last September that it would scrap the cap that currently applies to bankers’ bonuses, the FCA and PRA launched a joint Consultation Paper on 19 December on the removal of the cap (PRA CP15/22 and FCA CP22/28).

Background

The bonus cap applies to UK banks, building societies and designated investment firms, and is set out in PRA and FCA rules. The effect of the cap is to limit the ratio of a bonus to fixed pay, so that an employee’s bonus (or variable pay) is no bigger than 100% of their fixed annual pay, or 200% if there is approval from the employer’s shareholders.

What are the regulators proposing?

The Consultation Paper notes that the regulators opposed the original introduction of the bonus cap during negotiations with the EU due to the potential upward pressure it can put on fixed pay which may not be linked to longer term performance and cannot be reduced or clawed back in the event of subsequent misconduct coming to light, or in response to changes in market conditions.

Over the years since the cap was introduced there has certainly been a clear trend towards increasing employees’ salaries and introducing other fixed role-related allowances to compensate for the limitations that were placed on bonus awards.

The key proposal now is to remove the cap entirely and delete the relevant references to the cap from the current PRA and FCA rules. The aim is to allow employers greater flexibility to gradually rebalance their pay structures towards variable pay. Alternatives were considered, such as imposing a higher limit on the bonus cap, but ultimately ruled out.

Importantly, the regulators intend to retain the current safeguards which govern the remuneration regime, namely:

• Fixed and variable components of total remuneration must be appropriately balanced (with each employer deciding the correct ratio within their own risk profile)
• Fixed remuneration must represent a sufficiently high proportion of total remuneration to allow a fully flexible policy to apply to bonus payments (including the possibility of paying no bonus at all
• The current tools designed to curb excessive risk-taking will still apply to bonuses such as deferral, payment in shares, malus, and clawback

Timing of the proposals

The consultation closes to responses on 31 March 2023 and the regulators are aiming to publish a final Policy Statement in Q2 of this year.

The changes will apply to the next performance year commencing after the publication date. For most banks this will be the 2024/25 performance year, therefore the first uncapped bonus round is still some way off.

As such, the stated aim of rebalancing remuneration in favour of bonus payments is unlikely to be realised quickly. As we flagged in our previous article (available here), attempting to reduce large fixed salaries, or remove existing role-related allowances, will inevitably carry employment law risks and needs to be handled carefully.

Affected employers should therefore turn their minds to the implications of removing the bonus cap at an early stage. Further analysis will follow on publication of the final Policy Statement from the PRA/FCA.