UK Regulators Confirm Bonus Cap Being Scrapped

The U.K. Prudential Regulation Authority and Financial Conduct Authority have published a joint policy statement confirming the "bonus cap" will be removed. Banks are subject to compensation requirements for staff who have a material impact on the bank's risk profile, and there is a cap on the ratio of variable to fixed compensation for identified staff – known as the bonus cap.

The changes are relevant to banks, building societies, and PRA-designated investment firms, including third-country branches that are subject to the Remuneration Part of the PRA Rulebook and to the FCA Remuneration Code for dual-regulated firms. The amendments will take effect from October 31, 2023, applying to a firm's performance year which is ongoing on that date, and to future performance years. Firms have flexibility as to when to make changes to compensation structures.

In their policy statement, the regulators remind firms of the existing rules that will continue to apply to a firm's compensation structure to ensure prudent risk-taking, such as the requirements that all variable compensation must be subject to risk adjustment and that the fixed and variable components of total remuneration must be appropriately balanced. The regulators have added guidance on how firms can set an appropriate ratio between the fixed and variable components.

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