FCA & PRA consult on remuneration reform – changes for banking sector

On 26 November 2024, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) (jointly ‘the Regulators’) issued Consultation Paper 16/24, in which substantial proposed changes to the remuneration regime are set out and feedback is requested by 13 March 2025. The proposed changes are relevant to banks, building societies and PRA-designated investment firms. This consultation is not relevant for credit unions and insurers.

The proposed changes are designed to support more “balanced and competitive outcomes for consumers and markets”. With these changes, the Regulators intend to make the UK remuneration regime more “effective, simple and proportionate. The proposals complement previous remuneration regime changes enhancing proportionality for small firms, and removing the bonus cap.”

While the amendments to the rules on deferrals and retention have been mentioned by both the PRA and the Chancellor in her Mansion House speech, the proposals also seek to reform other elements of the regime that, if progressed, would result in significant changes to the remuneration regulations for the UK.

As with any change to remuneration packages comes the statutory requirement to ensure that the relevant employment tax liabilities and accounting treatment are fully complied with. This tax treatment will differ depending on whether the elements of pay are cash or equity awards. Deferred entitlement can bring complexity on the timing for the employment tax and national insurance liability triggers.

The global financial crisis was a trigger for the introduction of a strict remuneration regime under the EU Capital Requirement Directives which the UK followed. Some would say that the UK went even further than the rules implemented in EU member states. The regulations were introduced to effect controls around the level and balance of cash and equity in executive remuneration practices in the banking sector as previous remuneration structures were considered to incentivise excessive risk taking within the industry. 

In recent years, however, these rules have increasingly been criticised as excessively punitive and a deterrent to attracting global talent to the UK. The regulators and the Government recognise that the current regulations have made the UK a less attractive location for global firms and talent.

The first response to this was the removal of the ‘bonus cap’ in October 2023, allowing firms to set their own ratio of variable to fixed remuneration. The ‘bonus cap’ also led to increased base salaries which were harder to adjust in response to economic uncertainties.

More recently, in the Chancellor of the Exchequer, Rachel Reeves’ first Mansion House Speech, she added her view supporting the need to consider regulation in the wider context of UK competitiveness.

The proposed changes by the Regulators retain the core foundations of the existing remuneration regime but seek to address some of the most complex and burdensome areas of the remuneration requirements. The proposed changes maintain the regime’s overall structure and objectives – in line with the internationally agreed Financial Stability Board (FSB) Principles & Standards for sound Compensation Practices - whilst simplifying the regime and tailoring it more to the UK market.

Identifying Material Risk Takers (MRTs)

The remuneration rules primarily apply to MRTs, whose activities are considered to have a potentially material impact on a firm’s risk profile. MRTs are identified by firms through a continuous identification process based on both quantitative and qualitative criteria. The quantitative criteria are not considered to be fit for purpose for the UK. The Regulators are proposing to replace these with a single criterium that where an employee’s total remuneration places them within the 0.3 percent of highest earners within a firm but they are not captured as a material risk taker by the qualitative criteria, firms will need to consider their impact on the risk profile of the firm and make a reasoned assessment of whether the employee is a material risk taker.

The regulators also propose to reinstate the pre-CRD V threshold (adjusted for inflation) at which firms may disapply certain remuneration rules (such as deferral) to MRTs and propose that MRTs would need to meet the following conditions to benefit from proportionality:

• Total remuneration does not exceed £660,000; and
• Variable remuneration does not represent more than 33 percent of the employee’s total annual remuneration.

The Regulators also propose to remove the concepts of ‘higher paid material risk taker’ and ‘significant firm’. This is a further simplification as firms would only need to consider whether an MRT is above or below a single proportionality threshold.

Deferral Periods and Vesting

The Regulators are proposing the following key changes:

• To reduce the vesting period from seven years to five years for senior management function-holders approved by the PRA;
• To reduce the vesting period to four years in all other cases; and
• Where previously the portion subject to a deferred vesting schedule rose from 40 percent to 60 percent where variable remuneration was above £500,000, this threshold has now been raised to £660,000 (adjusting for inflation).

The consultation also proposes to allow vesting to start immediately, rather than three years from the point at which the award is made. This is a simpler approach which will allow bonuses to be received faster. The requirement for a proportion of an award to be made in financial instruments will remain but ‘holding periods’ will be removed, also allowing non-cash elements to be received faster.

The consultation also proposes that the prohibition on payment of interest or dividends on deferred instruments is removed.

Increased Accountability for Senior Managers

The Senior Managers and Certification Regime (SMCR) was introduced in 2016, resulting in the most senior executives becoming increasingly personally accountable for breaches of law and regulation and this trend continues in the consultation. The proposals aim to ensure that variable remuneration better reflects risk-taking outcomes and individual responsibilities with better links between the SMCR and remuneration regimes.

The Regulators are seeking to improve the link between remuneration and individual accountability by:

• Introducing a rule for firms to consider adjusting the remuneration of accountable individuals up the management chain in the event of failures in risk management;
• Introducing a requirement to ensure that senior management are accountable for their performance against PRA supervisory priorities; and
• Clarifying expectations for Remuneration Committees with regards to determining accountability for adverse risk events.

SMCR is currently under separate review by the Regulators following DP 23/3.

Simplification of Handbook

The FCA is proposing to consolidate rules which are currently duplicated in the FCA Handbook and the PRA Rulebook. This is intended to avoid unnecessary duplication and to ensure greater consistency and alignment of the Regulators’ remuneration rules by removing the need for the FCA to maintain its own set of parallel remuneration rules. This is likely to be a welcome proposal for dual-regulated firms.

Firms should start to consider whether it is appropriate for their business to amend share plans to take advantage of the potential additional flexibility, including whether any shareholder approvals might be required.

The additional expectations for firms regarding adjustments to variable remuneration include requirements for information regarding risk incidents to be shared with remuneration and risk committees. Firms should ensure that they have robust consequence management frameworks and policies in place and that the flows of management information to these committees are in line with regulatory expectations. In addition, employee consents to the malus and clawback policy should be included in all relevant bonus and share plan documentation.

The proposed changes identified in this consultation bring significant opportunities for remuneration committees and Boards to review the current remuneration packages for senior employees in their organisations. Separately, but still relevant, the UK Investment Association (IA) recently published their Principles of Remuneration 2025, signalling a change in the IA’s thinking to reflect the competitive landscape in the UK and evolving investor expectations. The IA report identifies three key overarching pillars:

1. Remuneration policies should promote long-term value creation through transparent alignment with the board’s agreed corporate strategy;
2. Remuneration policies should support individual and corporate performance, encourage the sustainable long-term financial health of the business and promote sound risk management for the benefit of material stakeholders; and
3. Remuneration policies should seek to deliver remuneration levels which are clearly linked to company performance.

Overarching objectives can best be met by remuneration committees considering the factors we discuss in this article. Collaborating with shareholders and demonstrating alignment between remuneration and value creation and protection.

The Regulators are aiming to publish a policy statement following their consultation in the second half of 2025. The proposed changes would come into effect the day after publication of the final policy statement and would apply to firms’ performance years starting after that date. 

For further information please contact:

• Vijay Solanki
• Alison Kelso