UK plans to give bankers bonuses years earlier amid regulatory relaxation

In the United Kingdom, significant regulatory changes regarding banking bonuses have been proposed by the Bank of England. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are aiming to amend the deferral periods for bonuses awarded to senior bankers. Currently, these deferrals last eight years, but under the new proposals, this period would be reduced to five years for top executives, while less senior bankers would see their bonuses granted after four years. Furthermore, the changes would allow for a portion of the bonuses to be paid out within the first year, a departure from the existing requirement to wait until the third year. This initiative is part of a broader strategy to enhance the competitiveness and growth of the UK's banking sector. Sam Woods, the CEO of the PRA, emphasized that these adjustments would not compromise financial stability. Instead, they aim to minimize bureaucratic hurdles and motivate responsible risk-taking among bankers. Notably, the UK had previously removed the banker bonus cap, introduced by the EU following the 2008 financial crisis, which restricted bonuses to twice an individual’s salary. This prior cap was perceived by some as a hindrance to effective performance-related pay structures. The PRA and FCA, in their proposals, argue that reducing the deferral periods will still allow adequate time for any risks or issues arising from executives' actions to be addressed. This is significant as it contributes to reversing the growing trend in banks of increasing fixed salaries that are not contingent on performance, thus creating a more performance-driven bonus system. Additionally, the regulators aim to incorporate clearer guidelines that link bonuses to risk-management outcomes, establishing accountability for financial results. Another aspect of the proposed changes is to eliminate certain EU-influenced restrictions that currently prevent the payment of dividends or interest on deferred bonuses paid out in shares. This would grant senior bankers greater freedom regarding their deferred bonuses, allowing a year’s wait before selling shares awarded as deferred bonuses. Furthermore, the upcoming regulations would also simplify the remuneration landscape by decreasing the number of bankers subjected to strict pay rules and providing firms with increased authority to decide who among their employees will fall under these regulations. Sarah Pritchard, the FCA's Executive Director, underscored the importance of these regulatory changes in reducing rule duplication and augmenting the UK banking sector's reputation and competitiveness. This consultation process, inviting feedback on the proposed changes, is set to close on March 13.