Introduction
This update is part of our ongoing series of articles monitoring developments in the regulation of remuneration in financial services companies. Most recently, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have disagreed with the European Banking Authority’s (EBA) interpretation of the proportionality principle in relation to the bonus cap. In particular the FCA and PRA have decided to keep their current approach of requiring smaller firms to determine an appropriate ratio between fixed and variable remuneration while not applying the bonus cap.
Background
Currently, all large banks and financial institutions have caps on the individual bonuses they can pay to their employees under the Capital Requirements Directive IV (CRD IV). The maximum bonus is 100% of salary or 200% provided there is shareholder approval of the increased limit. The UK, while it has implemented this measure, has been opposed to it. The main concern is that it will lead to higher fixed salaries and a reduced capacity to align employee’s interests to those of their employer. However, smaller UK businesses have not been subjected to the cap as the FCA and PRA considered this to be disproportionate based on their (financial) size and therefore, the level of risk these businesses carried.
The EBA’s recommendation that the principle of proportionality does not apply to the bonus cap which should be applied to all material risk takers was reported on in our Financial Sector: 2016 Remuneration and Compliance Briefing. It is also worth noting though, that the EBA has agreed with the UK position that smaller businesses should be exempt from some of the rules under CRD IV. However, the EBA’s view is that the proportionality principle cannot be used to avoid the requirements in their entirety.
This development
The FCA and PRA have defended their view that the UK approach is proportionate and that these smaller institutions carry less risk to the wider economy. The FCA and PRA issued a statement which notified the EBA that the UK will comply fully with the EBA Guidelines except for the provisions in relation to bonus caps.
As a result the UK position will, for now, stay as it is. The proportionality principle will remain and smaller businesses will not be subject to bonus caps in the same way as larger ones.
All UK firms subject to CRD IV still have to comply with the other aspects of the EBA guidelines and the FCA and PRA are considering whether any other rule changes will be required to implement them in the UK.