UK Regulators Set to Ease Bonus Rules for Senior Bankers

British financial regulators announced plans today to significantly relax restrictions on banker bonuses, marking another major shift in the UK’s approach to financial sector pay following Brexit. The proposals aim to boost the City’s competitiveness while maintaining safeguards against excessive risk-taking.

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) launched a joint consultation that would reduce the mandatory deferral period for senior banker bonuses from eight years to five years, while also removing several EU-originated pay restrictions.

Under the new proposals, less senior bankers captured by the regime would see their bonus deferral periods reduced to four years. The changes would also allow partial bonus payments from the first year, rather than requiring bankers to wait until year three as some currently must.

“These proposals on bankers’ bonuses will support UK growth and competitiveness without undermining financial stability,” said Sam Woods, Deputy Governor of Prudential Regulation and CEO of the PRA. “We should not return to the very dangerous pay structures that were commonly in place before 2008, but these proposals will reduce bureaucracy and support responsible risk-taking.”

The reforms represent a careful balance between attracting talent to London’s financial sector and maintaining proper oversight of risk-taking behavior. The regulators argue that the proposed deferral periods still provide sufficient time for any problems to surface while creating a more competitive environment for UK banks.

The changes aim to address an unintended consequence of stricter bonus regulations: banks shifting more compensation into fixed pay, which cannot be adjusted downward if problems emerge. The regulators suggest that by making the bonus system more flexible, banks will be better able to align pay with performance and risk outcomes.

Sarah Pritchard, Executive Director for Consumers, Competition and International at the FCA, emphasized the streamlining benefits of the proposals: “These important changes will remove unnecessary duplication of rules between the regulators, streamline the remuneration regime for firms, and further strengthen the reputation and competitiveness of the UK banking sector.”

The consultation also proposes removing EU-originated guidelines that currently prohibit paying dividends or interest on deferred bonuses awarded in shares or other instruments. Another EU rule requiring senior bankers to wait up to a year before selling deferred bonuses in shares would also be eliminated.

In a move to simplify the regulatory framework, the FCA plans to remove several remuneration rules from its Handbook where they duplicate requirements in the PRA Rulebook. This change means firms will largely only need to refer to one set of remuneration rules, reducing regulatory complexity.

Despite the easing of certain restrictions, the proposals actually strengthen some accountability measures. The reforms introduce clarifications to existing policies ensuring that firms consider adjusting pay in the event of risk-management failures. They also create stronger alignment with the Senior Managers Regime, requiring firms to consider performance against PRA supervisory priorities when determining bonus payouts for responsible Senior Managers.

The changes follow several significant reforms over the past year aimed at boosting the competitiveness and growth of the UK financial sector. These included changes to the Basel 3.1 framework and the introduction of the strong and simple capital regime. Most notably, the removal of the banker bonus cap in 2023 has already led several firms to announce plans for higher bonus ratios, increasing the attractiveness and sensitivity of pay packages to risk outcomes.

The current system requires a maximum deferral period of seven years for higher-paid senior managers, plus a retention period of 6 to 12 months, which the PRA now proposes to abolish as part of this reform.

The regulators argue that these changes will bring the UK’s rules more in line with other countries while maintaining appropriate safeguards. The proposed periods for deferral of bonuses are designed to provide enough time for problems to surface while creating a more competitive environment for UK-based banks.

The consultation represents another step in the UK’s post-Brexit approach to financial regulation, balancing the twin objectives of maintaining financial stability and enhancing the City’s global competitiveness. It suggests that while regulators remain mindful of the lessons from the 2008 financial crisis, they are increasingly focused on ensuring London remains an attractive global financial center.

The consultation opened on November 26, 2024, and interested parties have until 11:59pm on March 13, 2025, to submit their responses. The proposed changes, once finalized, will mark one of the most significant reforms to banker pay regulation since the post-financial crisis rules were introduced.

This comprehensive overhaul of the bonus regime aims to position the UK financial sector for growth while maintaining appropriate risk management standards. By simultaneously streamlining regulations and strengthening accountability measures, regulators are seeking to create a more efficient and competitive banking sector without compromising on financial stability.