Will removing the bonus cap have the desired effect?

On the 24th October 2023 the PRA and the FCA issued a joint Policy Statement PS 9/23 and PS 23/15 respectively on removing the bonus cap. The requirements came into effect on the 31st October and apply to current and future performance years and applicable to relevant staff in

• Banks
• Building societies
• PRA-designated investment firms.

The bonus cap did not limit total remuneration but did limit the variable remuneration a firm could pay relative to an individual’s fixed pay which meant it resulted in limiting the proportion of remuneration that could be adjusted by risk and performance measures. Some may say that approach was necessary given the behaviour we saw leading up to 2008/9 financial crisis.

The regulators believe by removing the bonus cap on variable remuneration they will advance their integrity and competition objectives in 2 ways:

• A greater proportion of total pay can be incentivised faster which they say “could contribute to a better alignment of incentives and financial rewards with principles of effective risk management, good conduct, and the long-term interests of the firms…likely to foster better market conduct and prudent risk management, thereby discouraging behaviours that can lead to misconduct and poor customer outcomes.”
• Competition wise, firms can attract new talent and compete with jurisdictions where there is no bonus cap.

The cynics among us may want to believe the overriding and only factor is advancing the regulators’ new secondary objective introduced by the Financial Services and Markets Act 2023 – the international competitiveness of the economy of the UK and its growth in the medium to long term.

For the objective(s) of the removal of the bonus cap to succeed without bringing back the wild west, the regulators need to act independently to monitor the impact of this closely and come down hard on those firms and senior managers who use this in the wrong way, focusing on reward for performance without competence i.e. increasing profit without aligning behaviour to good consumer outcomes.

If you would like help in understanding how this or any other regulatory requirements could work in your firm to meet yours and the regulators objectives please contact Philippa Grocott ([email protected]), our Head of Regulatory Sales.