1.1 This policy statement (PS) from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) (jointly, ‘the regulators') provides feedback to responses to the joint consultation paper (CP) PRA CP15/22 and FCA CP22/28 – Remuneration: Ratio between fixed and variable components of total remuneration (‘bonus cap’). For simplicity, these two CPs are referred to below as CP15/22.
1.2 Although the regulators have considered the responses to feedback independently of one another, and in accordance with their statutory objectives, final policy is being published jointly to avoid unnecessary duplication. Responses have been shared between the regulators.
1.3 This PS provides the regulators’ final policy as follows:
- changes to the Remuneration Part and the Disclosure (CRR) Part of the PRA Rulebook (Appendix 1);
- changes to the Senior Management Arrangements, Systems and Controls (SYSC) 19D: Dual-regulated firms Remuneration Code that is part of the FCA’s Handbook (Appendix 2); and
- updates to the PRA’s supervisory statement (SS) 2/17 – Remuneration (Appendix 3).
1.4 This PS is 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 SYSC 19D: Dual-regulated firms Remuneration Code (collectively referred to as ‘banks’ in this PS). This PS is not relevant to credit unions, insurers, and FCA solo-regulated firms. While this PS does not affect FCA solo-regulated investment firms that are subject to other Remuneration Codes, it will be of interest to solo-regulated investment firms that are members of a group to which the Dual-regulated firms Remuneration Code applies on a consolidated basis.
1.5 In CP15/22, the regulators proposed to remove the current limits on the ratio between fixed and variable pay and related provisions on shareholder approval and discount rates by:
- deleting Rule 15.9 (3) of the Remuneration Part of the PRA Rulebook, which sets out the limit on the maximum ratio between fixed and variable pay, and connected provisions in Rules 15.10, 15.11, 15.12, and 15.13 on shareholder approval and discount rates, as well as a consequential change to Rule 3.1(B);
- amending paragraph 1(d) of Article 450 (disclosure of remuneration policy) of the Disclosure (CRR) Part of the PRA Rulebook;
- amending paragraph (d) of Annex XXXIII Table UK UKREMA of the Disclosure (CRR) – Pillar 3 Templates and Instructions Part of the PRA Rulebook;
- amending paragraphs (3.16, 5.32–5.33, 5.39, 5.40–5.43) of PRA SS 2/17 – Remuneration, and making an amendment to Table D: Disclosure requirements by proportionality level; and
- deleting the following rules in the FCA Handbook: SYSC 19D.1.3R(2), SYSC 19D.3.48R(3), SYSC 19D.3.49R, SYSC 19D.3.50R, SYSC 19D.3.51R, and SYSC 19D.3.52R.
1.6 The regulators received twelve responses to the CP. Most respondents welcomed the regulators’ proposals. Respondents made a number of observations and requests for clarification which are addressed in Chapter 2.
1.7 In CP15/22, the PRA proposed to delete paragraph 3.16 (‘Determining the fixed component of total remuneration for the fixed to variable ratio’) and paragraph 5.33 (‘Guaranteed variable remuneration’) from SS2/17: Remuneration. Following feedback received from two respondents that: (a) the deletion in paragraph 3.16 may be interpreted by firms as meaning that they should no longer use an annualised rate to determine the fixed pay of a part-year MRT, and (b) the deletion in paragraph 5.32 may be interpreted as the PRA being comfortable with excluding guaranteed variable remuneration from the calculation of the variable component, the PRA has decided to retain paragraphs 3.16 and 5.33 in SS2/17.
1.8 In light of feedback received, the PRA has added paragraphs 3.18A–3.18C in SS2/17 to provide guidance on the factors for firms to consider when setting an appropriate ratio between fixed and variable pay. The FCA has also added guidance to the FCA Handbook, under SYSC 19D.3.48AG which is based on the guidance provided for firms subject to the FCA Prudential sourcebook for MIFID Investment Firms (MIFIDPRU) Remuneration Code. The specific change and rationale are set out in Chapter 2.
1.9 In CP15/22, the regulators proposed to apply the changes regarding the removal of the bonus cap to firms’ performance years starting after the date of publication of the final policy. Following feedback received from three respondents, the regulators have decided to amend the approach to implementing the final policy so that the changes would apply to firms’ ongoing performance year from 31 October 2023 when the changes to the PRA’s Rulebook and the FCA’s Handbook would enter into force. The specific change and rationale are set out in Chapter 2.
1.10 When making rules, the regulators are required to comply with several legal obligations, including considering responses to consultation and publishing an explanation of each regulator’s reasons for believing that making the proposed rules is compatible with its objectives and with its duty to have regard to the regulatory principles.footnote  In addition, when making CRR rules or rules applying to certain holding companies, the regulators must consider certain additional matters, and publish an explanation of the ways in which that consideration has affected the proposed rules.footnote  In CP15/22, the regulators set out this explanation in Chapter 2: The regulators’ proposals.
1.11 In carrying out its policy making functions, the PRA is required to have regard to several matters, as set out in Appendix 5: PRA statutory obligations of CP15/22. In CP15/22, the regulators explained how they had regard to the most relevant of these matters in relation to the proposed policy. Below, the regulators provide an updated explanation, taking into account changes arising from consultation responses where relevant.
1.12 The FCA compatibility statement in CP15/22 in particular explained why the FCA considers making the proposed rule/s is: (a) compatible with its general duty under section 1B(1) of FSMA, so far as reasonably possible, to act in a way that is compatible with its strategic objective and advances one or more of its operational objectives, and (b) its general duty under section 1B(5)(a) of FSMA to have regard to the regulatory principles in section 3B of FSMA. This statement also explained how the FCA had regard to the principles in the Legislative and Regulatory Reform Act 2006, the Regulators’ Compliance Code, HM Treasury recommendations on economic policy (as set out in their letters from March 2021footnote  and April 2022,footnote  and how the proposals are compatible with the duty on the FCA to discharge its general functions in a way that promotes effective competition in the interests of consumers (section 1B(4)).
1.13 The PRA considers that the change to the approach to implementation would advance the PRA’s safety and soundness objective as firms will be able to restructure pay faster and the change would give firms further flexibility over their cost base to deal with downturns. The change to the approach to implementation would also achieve the secondary PRA objective of facilitating effective competition as firms would be able to immediately apply the change which would give firms more flexibility to risk share with employees.
1.14 Similarly, the FCA considers the change to implementation would mainly advance its integrity and competition objectives in the following ways: (a) Having the flexibility to restructure pay faster should allow for a greater proportion of total pay to be subject to incentive setting tools within the remuneration framework sooner, which in turn 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. This is likely to foster better market conduct and prudent risk management, thereby discouraging behaviours that can lead to misconduct and poor customer outcomes, and improving the safety and soundness of dual-regulated firms and the wider financial system, (b) From a competition perspective, firms could, for example, compete for and attract new talent sooner, and more generally, UK firms could be able to compete more effectively when doing business in jurisdictions where there is no bonus cap.
1.15 Although firms may benefit from the flexibility resulting from the change in implementation approach, they may, if they wish, still choose to wait until a later date (for example, the start of their next performance year) before making any changes.
1.16 In addition, the change in implementation approach advances the regulators’ new secondary objective introduced by the Financial Services and Markets Act 2023. The secondary objective, in summary, requires the PRA and the FCA to act so far as is reasonably possible in a way that facilitates (subject to aligning with relevant international standards) the international competitiveness of the economy of the UK and its growth in the medium to long term. The final policy in this PS has been assessed against this new objective and the regulators consider the proposals are compatible with it.
1.17 In summary, a bonus cap is not routinely imposed in other leading international financial centres outside the EU. The bonus cap has been identified as a factor in limiting labour mobility. The final policy facilitates this objective by removing this barrier in the UK.
1.18 The regulators consider that the changes to the final policy will enhance clarity and flexibility, to the benefit of firms, without adding any additional burden. The impact of the regulators’ changes to the final policy is expected to be no different for mutuals than for other firms.
1.19 The regulators consider the final rules have taken into account concerns raised by respondents and considers the final rules continue to support the have regards as set out for the PRA in paragraphs 2.11–2.24 and the FCA in paragraphs 2.25–2.34 of CP15/22, respectively. The regulators consider the responses to the consultation did not significantly alter their consideration of the matters to which they must have regard in implementing the final policy.
1.20 The regulators have considered the equality and diversity issues that may arise from the final rules in this PS. One respondent asked the regulators to introduce a wider range of pay gap reporting (eg by ethnicity) to complement existing gender pay gap reporting. The feedback is discussed in detail in Chapter 2.
1.21 The regulators have taken into account the impact of the final rules on their cost benefit analysis (CBA). In the consultation, no feedback was received on the CBA. Furthermore, the PRA and FCA do not consider the limited changes (in light of feedback received) would result in any material changes to their original CBA; therefore, the regulators consider that the CBA as consulted on remains appropriate.
1.22 The PRA must also publish a summary of the purpose of the proposed rules.footnote  This is set out in CP15/22 (paragraph 1.10). Since the bonus cap does not limit total remuneration, the regulators consider it can place upward pressure on salaries and allowances that may not be linked to longer-term performance and cannot be reduced or clawed back in the event of later failure and/or previous misconduct coming to light. A larger element of remuneration that is fixed, rather than variable, can also reduce firms’ flexibility to adjust to changes in conditions. Over recent years, the regulators consider that growing evidence has emerged of undesired consequences of the rules on firms’ safety and soundness and UK competitiveness. Empirical evidence on the impact on pay structures, waiver applications received since the extension of the rules to a wider set of firms, and other findings gathered as part of a PRA evaluation of the remuneration regime have collectively highlighted the impact of the bonus cap on raising fixed salaries and allowances, and prompted the need to review the existing limits on the ratio of the variable component of total remuneration. Despite the change to the implementation date so that the final policy would apply immediately following publication, the purpose of the proposed rules remains the same as consulted on.
1.23 The requirements will be effective on 31 October 2023. As explained above, the changes will apply to a firm’s performance year which is ongoing on that date, and to future performance years. The regulators would not ask firms to re-submit their Remuneration policy statements for the ongoing year if they have already done so before the date of the publication of final policy.
2.1 Before making any proposed rules, the regulators are required by FSMA to have regard to any representations made to them, and to publish an account, in general terms, of those representations and their feedback to them.footnote 
2.2 The regulators have considered the twelve responses received to the CP. Most respondents welcomed the proposal to remove the bonus cap. This chapter sets out the responses, the regulators’ feedback to those responses, and their final decisions.
2.3 The regulators are implementing the final policy as consulted to remove the bonus cap, with some minor amendments in response to feedback received. Respondents who welcomed the proposal agreed with the regulators that removing the cap allows firms to react to downturns and absorb losses, increases competitiveness and opportunities for talent acquisition, removes an administrative burden for firms to apply and regulators to assess waivers, and increases senior management accountability by aligning pay with risk outcomes.
2.4 Two respondents objected to some aspects of the proposed policy. One emphasised the importance of using other measures to achieve the original objectives of the bonus cap such as removing the ability for firms to use Role-Based Allowances and increasing disclosures. Another respondent noted that the removal of the bonus cap would not achieve the CP’s aims unless combined with shorter deferral periods.
2.5 The responses have been grouped as follows:
- timing of implementation of new policy;
- guidance on appropriate ratio for fixed to variable pay;
- guaranteed variable remuneration and European Banking Authority (EBA) guidelines
- Material Risk Takers (MRTs) who join part way through the year and calculation of fixed component;
- equality and diversity considerations;
- wider reforms; and
- other points raised.
2.6 In CP15/22, the regulators proposed that the final policy would apply to firms’ performance year starting on or after the day when the rule changes enter into force.
2.7 Eight respondents commented on the timing of implementation. Responses varied, with three welcoming the proposal to implement new rules from the next performance year (starting on or after the date of PS publication) while two respondents asked for earlier implementation of the new policy. One respondent asked for earlier implementation for new hires. Two respondents made general comments that the practical timing of implementation would be impacted by internal governance processes and employment law contracts with three respondents noting that reversing the unintended consequence of increased fixed pay is a complex process that would take time.
2.8 Having considered the responses, the regulators have decided to allow for earlier implementation of the changes. The regulators considered the option suggested by one respondent of allowing early implementation for new hires only, but concluded that this would have been impractical and would likely have given rise to a number of potential inconsistencies in treatment and adverse incentives, given the difficulties in defining precisely which employees should be eligible to be treated as new hires. The regulators recognise that allowing the new policy to apply earlier than was proposed would give firms full flexibility in determining when to make changes to remuneration structures. This enables firms to decide how best to manage the speed of implementation for their employees bearing in mind their own internal processes and to restructure total pay for all employees (MRTs) if they choose. While the regulators are providing full flexibility, firms can still apply the change from their next performance year should they wish to do so (or keep their current approach indefinitely, if they prefer).
2.9 From an incentive-setting perspective, firms are reminded that the rules below continue to apply and aim to better align remuneration with prudent risk taking. These shape the nature of incentives and ensure accountability, including by continuing to require:
- at least 40% (and in the case of certain senior MRTs or individuals who receive variable remuneration of £500,000 or more, at least 60%) to be deferred for a minimum of four years, and longer for individuals performing an executive PRA Senior Management Function in regulated firms;
- at least 50% of the variable remuneration to consist of shares or other non-cash instruments that reflect the performance of the firm;
- all variable remuneration to be subject to risk adjustment, including in-year adjustment, malus, and clawback, which in some circumstances must be applied based on the performance of the firm, the business unit, and the individual;
- the total variable remuneration does not limit the firm's ability to strengthen its capital base; and
- the fixed and variable components of total remuneration are appropriately balanced.
Guidance on appropriate ratio for variable and fixed pay
2.10 Two respondents noted that they would welcome guidance on how to set ‘appropriate’ ratios. Two others welcomed the full flexibility of the proposal.
2.11 Having considered this feedback, the regulators have decided to add principles-based guidance and examples in SS2/17 in new paragraphs 3.18A–3.18C titled ‘Setting an appropriate ratio between the fixed and variable components’ and FCA Handbook guidance under SYSC 19D.3.48AG, which is based on the guidance provided for firms subject to the FCA Prudential sourcebook for MIFID Investment Firms (MIFIDPRU) Remuneration Code.
Guaranteed variable remuneration and EBA guidelines
2.12 In CP15/22, the PRA proposed to delete paragraphs 5.32 and 5.33 from SS2/17, which refer to the calculation of the fixed to variable ratio. The paragraphs cover the PRA’s approach to guaranteed variable remuneration.
2.13 Two respondents noted that this deletion may be interpreted as the PRA being comfortable in the future for firms to adopt the approach set out in the EBA Guidelines, ie to exclude guaranteed variable remuneration from their calculation of the fixed to variable ratio and to not apply the deferral, malus, and clawback rules to this element. The suggested interpretation is not the PRA’s intention.
2.14 Having considered the responses, the PRA has decided to delete paragraph 5.32 of SS2/17 as proposed in the CP, but to reinstate paragraph 5.33 (with removal of the word 'however' in the first sentence). The rationale is to maintain the current approach of including guaranteed variable remuneration in the variable component of the fixed to variable ratio as these payments are no different to other elements of variable pay that should be subject to remuneration rules (including malus and clawback) to align incentives appropriately.
2.15 One respondent requested clarification regarding ongoing compliance with the EBA Guidelines that conflict with the proposed changes contained within the CP. Under the FCA’s published guidance on the post-Brexit approach to compliance with EU non-legislative materials, the regulators require firms to continue to apply the EBA Guidelines ‘to the extent they remain relevant’. As the bonus cap rule is being removed from the FCA’s Handbook, the content of the EBA guidelines related to the bonus cap no longer remain relevant so would not apply to firms. The PRA also reminds firms that paragraph 1.9 of SS2/17 sets out the expectation for firms to continue to make every effort to comply with all aspects of the EBA’s 2015 Guidelines, save where the Remuneration Part of the PRA Rulebook mandates a different approach. In this context, guaranteed variable remuneration should be calculated in the variable component of total pay.
Material Risk Takers (MRTs) who join part way through the year and calculation of fixed component
2.16 In CP15/22, the PRA proposed to delete paragraph 3.16 from SS2/17, which refers to the calculation of the fixed component of variable pay.
2.17 Two respondents noted that the deletion may be interpreted by firms as meaning that they should no longer use an annualised rate to determine the fixed pay of a part-year MRT. That is not the PRA’s intention.
2.18 Having considered the responses, the PRA has decided to reinstate paragraph 3.16 in SS2/17. This is to avoid confusion and, as firms still have to calculate own ratios, paragraph 3.16 expects firms to use the annualised rate method for determining the proportion of fixed pay of a part-year MRT.
Equality and diversity considerations
2.19 As noted in CP15/22, the regulators have considered the equality and diversity issues that may arise from the proposals. There is evidence suggesting that gender pay gaps in bonuses are typically larger than in fixed pay, and that the banking sector may have high gender pay gaps.footnote  Such pay gaps may exist for other protected characteristics as well.
2.20 One respondent asked the PRA to introduce a wider range of pay gap reporting (eg by ethnicity) to complement existing gender pay gap reporting in order to avoid diversity implications.
2.21 The regulators have considered the equality and diversity issues that may arise from the final policy in this PS. Having considered the response, the regulators have decided not to amend the draft policy. The Government Equalities Office and the Equality and Human Rights Commission are responsible for monitoring compliance with, publishing inquiries on, and enforcing relevant legislation concerning gender pay gap issues for firms, including those in the financial services sector.footnote 
2.22 The regulators consider that the gender pay gap exists for a number of reasons, including underrepresentation of women and minorities in more senior banking roles, and not because of the existence or otherwise of the bonus cap. The regulators also acknowledge that without proper mitigation and focus by firms, there is a risk that removing the bonus cap may exacerbate the gender pay gap. This is mitigated to some degree by all employers being bound by employment law legislation, and firms with over 250 employees being required to report on the gender pay gap.
2.23 The regulators remind firms that they continue to be required to establish, implement, and maintain remuneration policies, procedures, and practices that are consistent with, and promote, sound and effective risk management. The FCA also reminds firms that they must already ensure these policies and practices are gender neutral. Pay gaps are a measure of differences in the distribution of the underlying workforce. The regulators encourage firms to create an inclusive and diverse environment where the most capable people are able to progress, regardless of their background. While the removal of limits on the ratio between fixed and variable components of total remuneration gives greater flexibility to firms, the regulators expect firms to take care to avoid adverse impacts on pay gaps when using this increased flexibility to set more appropriate pay ratios.
2.24 Three respondents noted that some deferral periods in the UK remuneration regime are considerably longer that in other jurisdictions. Two noted that longer deferrals means that firms will push up total compensation to ensure that the package (and cashflow) is competitive and high enough compared to other jurisdictions where shorter deferral periods apply. Two respondents asked the PRA to consider changes to the deferral periods. Two respondents requested clarity on the timing of wider reforms including clarity on how this reform fits within wider reforms such as the Senior Managers and Certification Regime (SM&CR) review.
2.25 Having considered the responses, the regulators note that these comments are beyond the scope of the consultation. For the PRA, as has been highlighted by Sam Woods in October 2022: ‘We [the PRA] also intend to look more broadly at the whole structure of rules around remuneration. We will consider how these rules, which are a patchwork of EU and UK regulations, can be streamlined and made more effective and proportionate. In doing so, we will be clear that rules around remuneration are an important tool to ensure decision-makers and risk-takers have the right incentives.’footnote  The PRA will take into account the responses on deferral periods in this wider review. The FCA may also consider a wider review of its remuneration regime subject to its strategic priorities.
Other points raised
2.26 One respondent asked that the regulators consider adding more flexibility for the treatment of buy-outs in the year of hiring an employee so that they are excluded from variable pay calculation in cases where the relevant banks have different fiscal years. In addition, the same respondent asked for clarification on how to approach a situation where a role linked to a Role Based Allowance and the MRT undertaking the role is replaced by another MRT. Specifically, the respondent asked if there is an expectation for the latter to continue receiving that allowance as well.
2.27 Having considered the response, this feedback is beyond the scope of this consultation, and concerns the wider remuneration rules. As such, the PRA and the FCA will consider these as part of any wider review of their remuneration regimes.
Sections 138I(2)(d) and 138J(2)(d) FSMA.
Sections 144 and 192XB(2) FSMA.
Section 144D(2) of FSMA.
Sections 138(3), 138I(4), 138J(3) and 138J(4) of FSMA.
See evidence from PwC report: Gender pay gap and diversity in financial services.
See paragraph 3.20 of HMT’s consultation response: Updating the UK’s Prudential Regime before the end of the Transition Period.
October 2022: Growth and competitiveness − speech by Sam Woods.