Smaller UK banks and investment firms will not have to abide by EU bonus cap rules – FCA and PRA

Chris Papadopoullos
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A general view of the London headquarter
The UK's big banks will still have to follow the rules (Source: Getty)

The UK's financial regulators have told their European counterparts they will not be applying the bonus cap to smaller banks and investment companies.

The Financial Conduct Authority (FCA) and the Bank of England's prudential regulation authority (PRA) have told the European Banking Authority (EBA) they will not apply the bonus cap to all firms recommended by the EBA's guidelines.

The bonus cap will still apply to big banks and financial firms deemed to be systemically important.

The Bank of England said:

Since the introduction of the bonus cap, a number of firms 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.

The Bank said all firms regulated by the so-called capital requirements directive must comply with all other aspects of the guidelines. The bonus cap is currently 100 per cent of fixed pay. It can rise to 200 per cent with shareholder approval.

UK regulators have been against the bonus cap for a long time. Andrew Bailey, who is now head of the FCA, was the only regulator on the EU's board of supervisors to vote against the cap.

British banks and regulators have tended to favour clawbacks, a policy where bonus payments are delayed for up to 10 years so they can be clawed back in the event something goes wrong.

“This is a common sense position and the support of domestic regulators will be applauded by the smaller UK banks and investment firms,” said Nicholas Stretch, a partner with law firm CMS.

“The bonus cap has indeed had the unintended consequence of driving up salaries and other fixed costs, while remuneration has in many cases remained the same. This move by the PRA and FCA acknowledges that it is particularly disproportionate and unnecessary at this level.”

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