The bonus cap will limit awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval.
While 'all large and systemically important CRD-regulated firms' must continue to apply the bonus cap, the FCA and PRA believe that smaller firms should determine an appropriate ratio between fixed and variable remuneration for their business whilst not applying the bonus cap.
In a statement, the FCA said that since the introduction of the bonus cap, "a number of firms have markedly increased fixed pay as a percentage of total pay, whilst total pay remained stable during the same period".
The PRA and FCA believe that the shift to fixed remuneration makes it more difficult for firms to adjust variable remuneration to reflect their financial health, and limits deferral arrangements that put remuneration at risk should financial or conduct risks subsequently come to light.
The blanket extension of the bonus cap to all firms regulated under CRD also "fails to recognise the different incentives and consequences for risk-taking across all CRD-regulated firms by disregarding the size, internal organisation, nature, scope and complexity of their activities".
Andrew Bailey, Deputy Governor, Prudential Regulation, Bank of England and CEO of the PRA, said:
“We have had an extensive debate on the issue of proportionality with our European counterparts. The PRA attaches a great deal of importance to the principle of applying policies in a proportionate manner consistent with the legal provisions. We have followed the principle of proportionality, which in practice means that smaller firms which pose less risk to the safety and soundness of the financial system face lower regulatory requirements. This is a sensible outcome."
Steven Cochrane, remuneration expert at law firm Pinsent Masons, said:
“The PRA has consistently opposed the bonus cap and its universal application, considering it to be a “bad policy”. It was not clear, however, whether the PRA and FCA would sustain their public opposition after finalisation of the EBA guidelines, which rule out any CRD IV firm escaping the cap on grounds of “proportionality”, no matter its size or how relatively “safe” its business. The UK regulators have now made it very clear that they will oppose universal application, with cogent reasons for their stance.
"Many firms will be pleased about this. Obviously, they will include firms which now have a reasonable hope of not having to apply the bonus cap for the first time from 1 January 2017, ie, those smaller UK-based “proportionality level 3” firms which are currently afforded more flexibility and can effectively dis-apply the cap. But other firms already subject to the cap, and which will not be released from it by the UK regulators’ stance, may also be encouraged that this statement could reinforce a broader debate about whether the cap should be retained at all, in a year in which the CRD IV remuneration rules are under formal review. Many of these larger firms have been grappling with their own compliance in the wake of the EBA’s narrow interpretation as regards when a “role based allowance” will genuinely represent fixed pay and these firms will be watching developments very closely."
