On 24 October 2023, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) (together, the Regulators) published their joint policy statement (Policy Statement) to remove the existing limits on the ratio between fixed (i.e., salary) and variable (i.e., bonus) components of total remuneration (the Bonus Cap). This follows the Regulators’ joint consultation on the Bonus Cap in December 2022 (Consultation) and comes nearly a year after Liz Truss’ short-lived government first announced plans to abolish the Bonus Cap to boost the attractiveness of the UK financial services sector. 

Background on the Bonus Cap

Following the 2008 financial crisis, the Bonus Cap was introduced in an attempt to curb excessive risk-taking in the UK financial services sector and remove a bonus culture encouraging short-term profits over longer-term stability. It was established when the UK was still a member of the European Union (EU) and limited how much additional variable pay employees of certain firms could receive. Such a pay-out was capped at twice the employee’s basic salary.

While the media regularly refers to the cap as the “banker bonus cap”, the Bonus Cap actually applies to employees of banks, building societies and certain investment firms (including proprietary trading firms and market makers), subject to proportionality rules for smaller firms.

Removal of the Bonus Cap

The Regulators are implementing the final policy, as was consulted on, to remove the Bonus Cap, with some minor amendments in response to feedback received to the Consultation, summarised below. Therefore, from 31 October 2023, the Regulators will abolish the Bonus Cap (and related provisions on shareholder approval and discount rates) by amending and deleting applicable rules. 

The Policy Statement makes the following key amendments to the Consultation:

the Regulators have drafted new principle-based guidance on the factors for firms to consider when setting an appropriate ratio between fixed and variable pay, which requires firms to consider all relevant factors including: (a) the firm’s business activities and associated prudential and conduct risks; and (b) the role of the individual in the firm and the impact that different categories of staff have on the risk profile of the firm;

the Regulators have confirmed the implementation timeline for the requirements (see the Next Steps section below), which allows for earlier implementation of the changes than proposed in the Consultation; and 

the Policy Statement restates language in paragraph 3.16 of the supervisory statement (SS2/17), which the Consultation proposed to delete. This is to avoid confusion and, as firms still have to calculate own ratios, paragraph 3.16 of SS2/17 expects firms to use the annualised rate method for determining the proportion of fixed pay of a part-year material risk taker. 

While the Bonus Cap will no longer apply from 31 October 2023, the Policy Statement also reminds firms of the existing rules that continue to apply to better align remuneration with prudent risk-taking.

Next Steps

The requirements come into effect on 31 October 2023. The changes will apply to a firm’s performance year that is ongoing on that date, as well as to future years. 

Notably, the Policy Statement states that firms may choose to wait until a later date (e.g., the start of their next performance year) before making any changes. Firms may also choose to keep their current approach indefinitely. Additionally, the Regulators will not ask firms to re-submit their remuneration policy statements for the ongoing year if they have already done so before 24 October 2023. 

Alongside the Policy Statement, the FCA advises the Remuneration Committee Chairs of “level one firms” (i.e., the largest firms) that it plans to write to them to reiterate its expectations about their remuneration policies aligning with and supporting a healthy culture and encouraging positive outcomes for consumers.

Concluding Remarks

Although firms could implement changes to their remuneration policies on 31 October 2023, we expect that many firms will not implement substantial changes in the near term. Ultimately, the removal of the Bonus Cap enables firms to have greater flexibility over how they align compensation incentives with effective risk management and good conduct. This aims to help firms retain and attract talent globally and compete against other firms such as asset managers, which are generally subject to less onerous restrictions. The abolition of the Bonus Cap is also a post-Brexit move intended to make the UK financial services sector more competitive internationally as a bonus limit is not routinely imposed in other leading financial centres outside of the EU. 

The Policy Statement, Consultation and SS2/17 are available here, here and here.