Implementation of New Bonus Capping Rules

CRD IV limits the variable remuneration that those affected by the rules may be paid to no more than one time’s salary, or two times salary with express shareholder approval. Although the UK Government has launched a legal challenge to the bonus capping rules in the European Court of Justice, the FCA and the PRA are still implementing them until directed otherwise. In particular, firms have been eagerly awaiting PRA and FCA’s views on whether the bonus capping rules will be applied on a proportionate basis or have to be applied by all firms.

The UK will go no further than required under European Law

Both the PRA and the FCA have said that they will implement the bonus capping rules but go no further than required under European law: eg they will not impose stricter caps on higher shareholder approval thresholds, lower the maximum discount percentage for five year non-cash instruments below 25% or place restrictions or prohibitions on the types of instruments that can be used for paying deferred variable remuneration. This is not the approach across all member states. For example, the Netherlands have imposed a 20 percent bonus cap.

Application of the bonus cap on a proportionate basis

Not all firms will be caught by the new rules.

The PRA’s views here are still awaited, which is unfortunate as it is those which will be relevant to banks and building societies who are most likely to be affected by the new rules.

Although the FCA does not currently regulate any firms in proportionality tiers 1 and 2 (primarily banks and large building societies), the recent FCA consultation paper states that only firms in tiers 1 and 2 would be caught by the bonus capping rules.

All firms currently regulated by the FCA fall within proportionality tier 3. The FCA’s basic approach is that these firms will not be required to apply the bonus capping rules, which is good news. However, firms will be expected to have considered whether they should apply the cap and to be able to demonstrate to the FCA, if requested, why it is able to disapply the bonus capping rules. Where the FCA considers that a firm potentially poses a greater risk it can require the firm to apply the cap. This is most likely to be the case for tier 3 firms which form part of a larger group which falls within tiers 1 or 2. The consultation paper estimates that this will be no more than 70-85 firms.

The FCA’s consultation paper includes proposed changes to the Remuneration Code to introduce the new bonus capping requirements (which follows the provisions in CRD IV) and guidance on how firms can disapply the new rules on the basis of proportionality will be addressed in changes to the FCA’s general guidance on proportionality.

The FCA consultation closes on 10 November 2013. The FCA intends to publish the final version of the new rules later in 2013 before they come into force on 1 January 2014 for variable remuneration that relates to performance on or after that date.

There is still no firm timetable for the announcement of the PRA’s views or its consultation, or whether it will follow the FCA’s lead and make it relatively easy for smaller banks (e.g. bank branches) not to have to comply with the bonus capping rules.

A copy of the FCA's consultation paper is available here.