The PRA and the FCA published CP15/22 and 22/28 in mid-December which proposes to remove the current limits on the ratio between fixed and variable components of remuneration for employees of dual-regulated firms, such as banks (often known as the “bankers’ bonus cap”). This follows the announcement in September 2022 by the then-Chancellor, Kwasi Kwarteng, that this cap would be lifted, a part of the “mini-Budget” which has not been scrapped by the new Government.
In this consultation paper, the UK regulators propose to remove the relevant provisions in relation to this cap from the PRA Rulebook, the FCA Handbook and other materials. Two points to highlight are however that:
- the regulators also propose a transitional provision whereby remuneration awarded for a performance year before the implementation date for the removal of the cap, will still be subject to the current bonus cap; and
- firms will still be subject to the remaining rules on remuneration, including the rule requiring a firm to set an appropriate ratio between fixed and variable remuneration.
The consultation closes on 31 March 2023.
We will need to wait and see what impact these changes have on basic salaries and allowances. Whilst in some cases, ‘rainmakers’ may be offered increased bonuses alongside their existing salaries, it appears more likely that in the event of the bonus cap being lifted, firms will (in particular for employees in value generating roles) take advantage of the opportunity to tie remuneration more closely to performance and decrease base salaries in return for the potential of higher discretionary bonuses.
The position on whether role-based allowances can be amended unilaterally will ultimately depend on the contractual terms governing these allowances. Banks often do have discretion under the terms to withdraw or amend role-based allowances and, whilst the potential impact of these changes remains to be seen, such role-based allowances may therefore be withdrawn to make way for bigger bonus potential following the repeal of the cap.