UK bankers’ remuneration reform: proposed relaxation of deferral and retention rules in focus

These proposals are part of a broader trend of deregulatory reforms, including the removal of the bankers’ bonus cap. The PRA and FCA are looking to ease the deferral, vesting, and retention restrictions currently applied to bankers’ variable pay. Their aim is to reduce the costs and compliance burden for UK banks while presenting UK remuneration packages as more attractive and competitive internationally.

For more background on the reforms, and on the “banks” and bankers (material risk takers or “MRTs”) within scope of the rule changes, please see our blogs: UK bankers’ remuneration: significant reform proposals, UK bankers’ remuneration reform: MRT proposals in focus 

What are the proposed changes? 

Changes to PRA and FCA rules (in the Remuneration Part of the PRA Rulebook and FCA SYSC 19D: Dual-regulated firms Remuneration Code) would:

• provide a simpler two-tier framework of rules on deferring variable pay – the minimum deferral period for Senior Managers would be five years (reduced from seven years in the case of PRA Senior Management Function holders), and for all other MRTs it would be four years;
• allow Senior Managers’ deferred awards to vest on a pro-rata basis from the time of award, rather than from the third anniversary of award; 
• remove the requirement for banks to set a retention period for deferred instruments that have vested (though a “meaningful retention period” such as one year would still need to be applied to non-deferred instruments); 
• remove the ban on banks paying dividends or interest on deferred instruments; and 
• increase the threshold at which at least 60% of variable pay must be subject to deferral from GBP500,000 to GBP660,000 (adjusting for inflation).

Better reward but greater risk

These changes are likely to mean that MRTs receive greater financial benefits from deferred awards and receive them much sooner – at the end of five years (with earlier part payments), rather than at the end of eight years (assuming a one-year retention period), as is currently the case for MRTs performing PRA Senior Management Functions. Also, fewer MRTs would be subject to a 60% deferral requirement.  

As a quid pro quo, deferred awards would be put at greater risk, as the PRA and FCA would expect banks to adjust Senior Managers’ and senior MRTs’ variable pay more rigorously (using malus or clawback) where they can reasonably be held responsible for misconduct or risk management failures that occurred “on their watch”. For our regulatory investigations colleagues’ insights on these proposals, please see: UK regulatory reform: Emphasising individual accountability through remuneration

Impact and action areas for banks

Banks are likely to welcome the prospect of simplified remuneration rules, which will allow for more competitive packages to attract and retain senior talent.

Final rules are expected in the second half of this year, to be applied to performance years starting after that date. This means that most banks would be implementing them for performance years starting on January 1, 2026. In anticipation, planning should begin in the following areas:

• Pay restructuring: Consider revisiting variable pay plans and pay ratios, particularly for senior manager MRTs, to take advantage of these changes. The regulatory aim is to encourage a shift towards a greater proportion of variable pay and lower fixed pay. As to the legal implications of removing or reducing fixed pay entitlements, please see our update: Removal of the bankers’ bonus cap: impact and next steps. For UK-listed banks, this could be an opportunity to align directors’ incentive conditions with those used by FTSE peers, who are generally expected by the UK Corporate Governance Code to apply a total vesting and holding period of at least five years. 
• Shareholder strategy: Consider whether any shareholder approvals are needed in relation to changes to pay ratios or incentive arrangements. In the case of UK-listed banks, it will be particularly important to plan a proactive communication strategy with shareholders to help mitigate potential resistance, while meeting the Investment Association’s expectations of greater transparency and dialogue. Those who are presenting a directors’ remuneration policy for shareholder approval at an upcoming AGM should check that there is flexibility built in for any changes to be made, to avoid the need to seek new approval over the next three years.
• Implementation approach: Identify how incentive plans and award documentation need amending to reflect new deferral, vesting and retention periods. The simpler two-tier framework of deferral rules would mean simpler clawback rules (although clawback periods would not change). In principle, there should be no need to update employment contracts, unless there are planned changes to fixed pay or to strengthen contractual clawback mechanisms. Plan communications with affected MRTs so that they understand the impact of any proposed changes (and if applicable, consider the requirements for and advantages of consulting them).