The Bank of England and Financial Conduct Authority (FCA) will not apply bonus cap rules to smaller firms.
The FCA and Prudential Regulation Authority (PRA) have informed the European Banking Authority (EBA) that they will comply with all elements of the EBA Guidelines on sound remuneration policies, except for the provision that limits on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval, should be applied to all organisations that are subject to the Capital Requirements Directive (CRD).
The FCA and PRA state that the approach to the bonus cap given in the guidelines is not representative of their interpretation of CRD, and that they consider the application of the rules to smaller firms to be disproportionate.
The PRA and FCA will continue their current approach of requiring smaller firms to determine an appropriate ratio between fixed and variable remuneration for their business while not applying the bonus cap.
All large CRD-regulated firms must continue to apply the bonus cap.
Andrew Bailey, deputy governor, prudential regulation at the Bank of England and chief executive officer 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.”
Steven Cochrane, partner at Pinsent Masons, added: “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 firm escaping the cap on grounds of ‘proportionality’, no matter its size or how relatively ‘safe’ its business.
“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.
“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.”