On 23 October 2023, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) published a joint Policy Statement (joint PS) on Remuneration: Ratio between fixed and variable components of total remuneration (‘bonus cap’) (PRA PS9/23 and FCA PS23/15).

The joint PS is relevant to banks, building societies, and PRA-designated investment firms, including third-country branches that are subject to the Remuneration Part of the PRA Rulebook and to the FCA SYSC 19D: Dual-regulated firms Remuneration Code. The joint PS is not relevant to credit unions, insurers, and FCA solo-regulated firms. While the joint PS does not affect FCA solo-regulated investment firms that are subject to other Remuneration Codes, it will be of interest to solo-regulated investment firms that are members of a group to which the Dual-regulated firms Remuneration Code applies on a consolidated basis.

The joint PS provides feedback to responses to the regulators’ joint consultation paper PRA CP15/22 and FCA CP22/28 (joint CP), which was published in December 2022. The joint CP aimed to strengthen the effectiveness of the remuneration regime by increasing the proportion of compensation that can be subject to the incentive setting tools within the framework.

In the joint CP, the PRA and FCA proposed to remove the current limits on the ratio between fixed and variable pay (the ‘bonus cap’) and related provisions on shareholder approval and discount rates.

In the joint PS the regulators note that, a bonus cap is not routinely imposed in other leading international financial centres outside the EU. The bonus cap has been identified as a factor in limiting labour mobility. The final policy facilitates this objective by removing this barrier in the UK.

The joint PS sets out the regulators’ final policy, which includes:

  • Changes to the Remuneration Part and the Disclosure (CRR) Part of the PRA Rulebook.
  • Changes to the Senior Management Arrangements, Systems and Controls (SYSC) 19D: Dual-regulated firms Remuneration Code that is part of the FCA’s Handbook.
  • Updates to the PRA’s supervisory statement SS2/17 on Remuneration.

The requirements set out in the joint PS will be effective from 31 October 2023. The changes will apply to a firm’s performance year which is ongoing on that date, and to future performance years. The regulators will not ask firms to re-submit their remuneration policy statements for the ongoing year if they have already done so before the date of the publication of final policy.

From an incentive-setting perspective, the joint PS reminds firms that the rules below continue to apply and aim to better align remuneration with prudent risk taking. These shape the nature of incentives and ensure accountability, including by continuing to require:

  • At least 40% (and in the case of certain senior material risk takers or individuals who receive variable remuneration of £500,000 or more, at least 60%) to be deferred for a minimum of four years, and longer for individuals performing an executive PRA Senior Management Function in regulated firms.
  • At least 50% of the variable remuneration to consist of shares or other non-cash instruments that reflect the performance of the firm.
  • All variable remuneration to be subject to risk adjustment, including in-year adjustment, malus, and clawback, which in some circumstances must be applied based on the performance of the firm, the business unit, and the individual.
  • The total variable remuneration does not limit the firm’s ability to strengthen its capital base.
  • The fixed and variable components of total remuneration are appropriately balanced.