Financial regulators have further loosened bonus rules in the City of London by reducing the amount of time bankers have to wait to receive their full awards.
The move, designed to maintain the international competitiveness of the city, will see the bonus wait halved from eight years to four years.
This goes further than that which the Bank of England’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) watchdogs originally proposed last autumn, when they suggested that deferral periods for the most senior, best-paid bankers be cut to five years, and to four years for more junior staff.
The changes will apply to the forthcoming bonus season this year.
The regulators said the reforms “bring the UK more closely in line with many other major jurisdictions” and that they had modified their plans after consulting with the industry.
Sam Woods, head of the PRA, said: “These new rules will cut red tape without encouraging the reckless pay structures that contributed to the 2008 financial crisis.”
The shorter deferral periods “will continue to provide enough time for firms to spot any problems and reduce individuals’ pay where needed”, the regulators said, adding that the revamp “should also help to reverse a trend which has seen banks put a higher amount of total financial reward into fixed pay.
“This matters as bonuses can be more rapidly reduced if individuals are found to have been at fault for poor decisions, or if the firm’s financial performance worsens.”
It comes two years after the regulators also scrapped the cap on banker bonuses that Britain inherited from the European Union, which had limited variable pay awards to twice a financier’s base salary.
Government ministers are urging the PRA and the FCA to cut red tape on the UK’s vast financial services sector as a way of boosting the economy.
As well as a shorter deferral period for senior bankers, the new bonus rules go beyond what was originally proposed in other ways. Under the old regulations, if a bonus exceeded £500,000 then 60% of the full award had to be deferred. Now, however, only 60% of sums above £660,000 must be deferred.
Firms are also now being allowed more latitude over the proportion of bonuses that can be paid in cash upfront.
As had been previously planned, the bonus rules will apply to a smaller proportion of bankers. Part-payment of awards, which presently for some of the most senior financiers is only permitted after three years, will also be allowed in the first year.
The package of changes means that more than 70% of the FCA’s remuneration rules in its handbook will be cut, with banks mainly having to focus on the PRA’s pay regulations. Sarah Pritchard, the FCA’s deputy chief executive, said that this streamlining removed “unneeded complexity”.
Andrew Speke, spokesperson for think tank High Pay Centre, said the changes “are effectively the removal of another of the safeguards put in place after the financial crash to protect the wider economy from excessive risk-taking in the financial services industry. While a number of those post-crash safeguards remain, it would be churlish to say this marks a full return to pre-2008 regulations, but there is certainly the potential for a slippery slope here, and we should ask who really benefits.
“The changes are likely to mostly benefit a very small number of high-earning bankers, while having little positive impact on the real economy. For a government that has criticised its predecessors for believing in trickle-down economics, this looks like more of the same. It’s also a poor reading of the public mood, especially amid a cost-of-living crisis rooted in deep inequality across the UK, where a small number of people have continued to do very well while the vast majority have experienced nearly two decades of stagnating living standards.”
