The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have notified the European Banking Authority (EBA) that they will not apply the cap on banker bonuses – limiting variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval – to smaller banks and financial firms.
Andrew Bailey, Deputy Governor, Prudential Regulation, Bank of England and CEO of the PRA said:
'We have had an extensive debate on the issue of proportionality with our European counterparts. The PRA attaches a great deal of importance to the principle of applying policies in a proportionate manner consistent with the legal provisions. We have followed the principle of proportionality, which in practice means that smaller firms which pose less risk to the safety and soundness of the financial system face lower regulatory requirements. This is a sensible outcome.'
All 'large and systemically important' banks regulated by the Capital Requirements Directive (CRD) must continue to apply the bonus cap. The PRA and FCA said they 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 banks 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. All CRD-regulated firms must comply with all other aspects of the Guidelines, and all existing domestic requirements. The PRA and FCA are considering whether any rule changes are required to implement the guidelines and, if necessary, will consult in due course.'