UK bankers’ remuneration: significant reform proposals

We outline the proposals here and will be taking a deep dive into their impact for UK banks and relevant stakeholders in an upcoming blog series.

The PRA and FCA’s joint consultation paper (PRA consultation paper 16/24 | FCA consultation paper 24/23) is targeted at banks, building societies and PRA-designated investment firms, as well as UK branches of third-country banks, that are subject to the Remuneration Part of the PRA Rulebook and FCA SYSC 19D: Dual-regulated firms Remuneration Code (together, banks). It is also relevant to FCA solo-regulated investment firms (e.g. asset managers) that are part of a UK banking group and caught by the dual-regulated rules.

Why the changes?

The regulators recognise that complex UK remuneration rules have been costly for banks and have hindered their ability to attract and retain talent. Their proposals aim to reduce these costs and give banks more flexibility, whilst enhancing the UK’s competitiveness internationally. Following on from rule changes in the last year to enhance proportionality for small firms and remove the bonus cap, the regulators now propose relaxing some other aspects of UK rules (some of which were EU-law derived but gold-plated in the UK), to align more with international market practice.

Another regulatory objective is to integrate the UK’s remuneration regime and accountability regime under SMCR more closely. The focus is on making Senior Managers and other senior MRTs more accountable by ensuring their pay better reflects risk-taking outcomes and individual responsibilities.

What is proposed?

Key changes would include:

Relaxing deferral and retention periods

• Reducing minimum deferral periods for Senior Managers from seven years to five years and aligning the minimum deferral period for all other MRTs to four years;
• Allowing Senior Managers’ bonuses to vest on a pro-rata basis from the time of award, rather than only starting to vest after three years;
• Allowing dividends or interest to be paid on deferred instruments awarded to MRTs; and
• Giving banks discretion as to the appropriate retention policy for deferred awards, such that banks are not required to set a retention period.

Simplifying the rules and expectations around MRTs

• Introducing a single quantitative threshold so that firms identify those within their 0.3% of highest earners as MRTs;
• Removing the requirement for firms to seek regulatory approval to exclude those who would otherwise qualify as MRTs based on quantitative criteria;
• Introducing enhanced governance expectations to underpin firms’ discretion when identifying MRTs (such as annual reviews of MRT methodologies); and
• Increasing the MRT proportionality threshold at which certain remuneration rules (such as deferral or payment in instruments) can be disapplied to those with total annual pay not exceeding GBP660,000 (from GBP500,000) and with variable pay not exceeding 33% of their total pay.

Linking the pay and individual accountability regimes more closely

• Requiring firms to consider adjusting MRTs’ variable pay (using malus or clawback) where it is reasonable that, by virtue of their role or seniority, they could be held responsible for risk events involving one or more members of their team;
• Requiring firms to consider Senior Managers’ performance against PRA supervisory priorities in pay decisions; and
• Clarifying how Remuneration Committees should approach variable pay adjustments.

Aligning FCA and PRA rules

• Restructuring FCA rules to cross-refer to the Remuneration Part of the PRA Rulebook, so that banks need only consult one substantive set of remuneration rules (save for a few FCA-specific provisions); and
• Exempting small banks from FCA rules on buyout awards (to align with the PRA’s exemption).

What next?

Banks have until March 13, 2025 to respond to the consultation. Final rules will be published in the second half of 2025 and will apply to performance years starting after that date, meaning that most banks will have to apply the new rules for performance years beginning on January 1, 2026.

Overall, the changes are likely to be welcomed, for relaxing remuneration rules, allowing more flexibility and discretion in remuneration policy, levelling the competitive playing field and facilitating group-wide remuneration frameworks. That said, considerable work will be required in the next year to prepare for the changes, and to review and amend arrangements in time, as well as planning communications with affected MRTs. Looking forward, the MRT identification governance burden will be increased, as firms will need to refresh and more regularly and robustly assess individual accountability and pay adjustments following instances of misconduct, risk management failings or downturns in financial performance.

In our upcoming blog series, we will combine insights with experts from our regulatory investigations team, to focus on the impact of these reforms for UK banks and relevant stakeholders as well as the likely action areas.