The PRA has published a speech by Katharine Braddick (Director for Prudential Policy, PRA). The speech is entitled The changing face of prudential policy.

At the beginning of her speech, Mrs Braddick mentions that great strides have been made with prudential regulation, in particular with the implementation of much of the Basel III accord through the CRD IV. She also states that perhaps above all else, the issue now urgently confronting prudential regulators is the need to put in place a credible and functional set of measures to ensure that large firms do not, when they fail, externalise the costs of their failures to society.

However, Mrs Braddick also states that regulators need to engage with the behaviours, responsibilities and incentives of those individuals who work in banks. She focuses the remainder of her remarks on remuneration.

Mrs Braddick provides a brief overview of the PRA’s misgivings about the effect of the bonus cap. A key principle for the PRA is ensuring that incentive structures are set up to encourage appropriate behaviour and risk taking. The PRA believes that a consequence of the cap may well turn out to be an increase in fixed pay. This would in turn have a negative effect on stability by locking in costs and reducing the scope for withholding individuals’ unvested variable remuneration, sometimes referred to as ‘malus’.

Beyond the bonus cap, Mrs Braddick covers another area that has attracted a significant amount of publicity which is the identification of material risk takers. She mentions that the PRA believes that the draft standard produced by the European Banking Authority is proportionate and fair. This standard is currently being reviewed by the European Commission, the European Parliament and the Council of the EU. If these institutions approve the standard in the next couple of months, it will come into force in time for the next round of bonus payments.

In the final part of her speech, Mrs Braddick focuses on the UK regulatory regime for banks, particularly the new powers given to the PRA under the Banking Reform Act 2013. In addition, she also mentions that later this year the PRA will be taking forward some of the recommendations of the Parliamentary Commission on Banking Standards (PCBS). On remuneration specifically, the PRA has said that it very much welcomes the thrust of the PCBS’ recommendations which is to strengthen key aspects of the current regime. One of these is deferral, where the PCBS argued for longer deferral periods for variable remuneration. The PRA agrees with this and will also consider the structure of deferral.

View The changing face of prudential policy, 11 March 2014