UK: PRA/FCA statement on the EBA's Guidelines on Sound Remuneration Policies

The Prudential Regulation Authority and Financial Conduct Authority have announced that they will comply with all aspects of the European Banking Authority's Guidelines on Sound Remuneration Policies, except for the provision that the bonus cap (which limits variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval) should be applied to all firms subject to the Capital Requirements Directive: see here. In reaching this decision, the PRA and FCA state:

All large and systemically important CRD-regulated firms must continue to apply the bonus cap. In parallel, the PRA and FCA will retain the current approach of requiring smaller firms to determine an appropriate ratio between fixed and variable remuneration for their business whilst not applying the bonus cap.

Since the introduction of the bonus cap, a number of firms have markedly increased fixed pay as a percentage of total pay, whilst total pay remained stable during the same period. The PRA and FCA believe that the shift to fixed remuneration makes it more difficult for firms to adjust variable remuneration to reflect their financial health, and limits deferral arrangements that put remuneration at risk should financial or conduct risks subsequently come to light.

The blanket extension of the bonus cap to all firms regulated under CRD would, in the PRA and FCA’s view, exacerbate these impacts, and fails to recognise the different incentives and consequences for risk-taking across all CRD-regulated firms by disregarding the size, internal organisation, nature, scope and complexity of their activities".