UK regulators cut banker bonus deferral period to boost competitiveness

Investing.com -- The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) announced Wednesday that they will reduce the bonus deferral period for senior bankers from eight to four years, effective October 16.

The regulatory changes aim to increase flexibility around senior banker pay while maintaining links between bonuses and responsible risk-taking. The new rules will apply to 2025 pay awards and any other awards made but not yet fully paid.

Under the revised framework, part-payment of bonuses for the most senior bankers will be allowed from year one, rather than year three as previously required. The regulators are also lifting restrictions on the proportion of bonuses that need to be deferred.

Previously, 60% of the full amount of any bonuses above the £660,000 threshold needed to be deferred. Now only 60% of amounts above that threshold will need to be deferred.

The changes will significantly streamline regulations, with the FCA’s remuneration Handbook rules being cut by more than 70%. Firms will now largely only need to refer to the PRA’s remuneration rules.

Sam Woods, Deputy Governor of Prudential Regulation and CEO of the PRA, stated: "These new rules will cut red tape without encouraging the reckless pay structures that contributed to the 2008 financial crisis. These changes are the latest example of our commitment to boosting UK competitiveness."

Sarah Pritchard, Deputy CEO at the FCA, added that the streamlined rules will "cut unneeded complexity" while ensuring senior managers "remain on the hook where poor decisions affect consumers and markets."

The regulators believe the new deferral periods will still provide sufficient time to identify problems and reduce individuals’ pay when necessary. The changes aim to reverse a trend where banks have shifted more total financial reward into fixed pay rather than performance-based bonuses.

Additional changes include giving firms more flexibility to allow a greater share of the cash element of bonuses to be received up front, with more of the share-based component being deferred to promote responsible risk-taking.

The rules also introduce greater alignment with the Senior Managers Regime, encouraging firms to tie bonuses closer to both executive successes and risk-management failures.

These changes follow the 2023 removal of the banker bonus cap, after which several firms began using this flexibility to offer higher bonus ratios, increasing the attractiveness and sensitivity of pay packages to risk outcomes.