UK overhauls bankers’ bonuses, strengthens clawback for senior managers

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) are consulting to extend the reach of the UK’s clawback regime to include responsible senior managers. The regulators said the change would better align senior managers’ actions with their financial rewards by ensuring that pay is adjusted should a risk management failure occur on their watch .

Chief risk officers will also have to annually review their firm’s material risk-taker methodology, which must then be signed off by the remuneration committee. Firms will have to mark senior managers against the PRA supervisory priorities when determining bonus payouts.

The PRA decided on the changes because it had not seen enough evidence of adjustments to remuneration up the chain of responsibility following adverse events, law firm Latham & Watkins said in a November 28 blog post.

In a note to clients, law firm Bryan Cave Leighton Paisner said the changes built on earlier efforts by the FCA to more closely align remuneration to compliance, culture and accountability. The note cited the ‘Dear Chair of Remuneration Committee’ letter the regulator sent on October 2023.

“If standards fall short, including as a result of non-financial misconduct, firms should ensure prompt and robust action is taken. Firms should also ensure that there is a clear, strong and evidenced link between behaviours and remuneration outcomes, including appropriate, timely and transparent adjustments,” the FCA said in the letter.

Deferral periods cut

The other key plank of the proposals in consultation paper 16/24 will see deferral periods for bonus payments significantly reduced, a move trailed by PRA chief executive Sam Woods in his Mansion House speech earlier this month.

Deferrals were part of measures introduced by the EU in an attempt to curb excessive risk taking by bankers following the 2008 global financial crisis. The UK used its post-Brexit freedom to remove the cap on total bonus payouts last year and is now seeking to streamline the remaining rules.  

Deferral periods for senior bankers who hold senior manager function (SMF status) will be cut to five years (from eight), and for less senior bankers (material risk takers) who are not SMFs they will be cut to four years. Deferrals for those who can currently receive part-payment of their bonus after three years will be cut to one year.

“These proposals on bankers’ bonuses will support UK growth and competitiveness without undermining financial stability. We should not return to the very dangerous pay structures that were commonly in place before 2008, but these proposals will reduce bureaucracy and support responsible risk-taking,” Woods said.

The regulators said the proposed changes kept the UK remuneration regime in line with the Financial Stability Board’s (FSB) Principles and Standards for Sound Compensation Practices. The consultation closes on March 13, 2025.