Following their earlier reforms aimed at reducing the regulatory burden for smaller banks and removing the bankers' bonus cap, the PRA and FCA have published a further Policy Statement seeking to make the remuneration regime simpler and more proportionate, enable banks to attract and retain key talent and to promote competitiveness and growth in the UK economy.
The reform goes further than proposed in the PRA and FCA's joint consultation paper of November 2024, reflecting feedback given in response to the proposals. The changes will be a welcome change for banks, providing greater flexibility in remuneration planning.
Key changes
The key changes are:
- Deferral period – The minimum deferral period for both SMFs and MRTs will be reduced to four years (from seven and five respectively). Deferred awards for senior managers may also vest on a pro-rata basis from the date of the award.
- Deferral rate – The higher deferral rate (60%) applicable to high earners will now apply on a marginal basis, meaning the 40% rate may be applied to the first £660,000 of all bonus awards.
- Payment in instruments – The requirement for 50% of bonuses to be paid in instruments remains unchanged. However, rather than applying this equally between upfront and deferred elements, firms may now pay a greater proportion of cash up front provided the deferred portion contains a correspondingly higher proportion of instruments.
- Retention periods – A one-year retention period will continue to apply to upfront awards but need no longer be applied for deferred instruments.
- Interest/dividends – Interest or dividends may now be paid on deferred instruments.
- MRTs – Qualitative criteria remain unchanged but the quantitative (remuneration-based) criteria will be simplified. A single quantitative MRT threshold will be introduced: banks will be required to consider employees within the 0.3% of highest earners to determine if they have a material impact on the firm's risk profile.
- Enhancing proportionality for MRTs - Proportionality thresholds will continue to apply to enable disapplication of certain remuneration rules for MRTs, with the total pay threshold increasing from £500,000 to £660,000 (variable pay cap remaining at 33%). An exemption will also be reintroduced for individuals who have been MRTs for less than 3 months.
- Individual accountability – Firms will be required to set criteria for the adjustment of remuneration of accountable individuals up the management chain in the event of adverse outcomes.
Some of these changes (including to the deferral period and pro-rata vesting) may be applied to a performance year ongoing on 15 October 2025 and to unvested remuneration relating to prior years. All other changes come into force on 16 October 2025 and apply to performance years starting after that date.
Finally, the FCA will make changes to SYSC 19D so that it largely cross-refers to the PRA's Remuneration Rules, removing the need for the FCA to maintain its own set of parallel remuneration rules.
For further information, please contact one of our employment regulatory experts.
