Senior bankers in the United Kingdom will pretty soon be able to profit from paceier bonus payments. This dramatic shift from mode to mode is largely a consequence of recently relaxed regulatory restrictions. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are part of the UK’s so-called Twin Peaks financial watchdogs. They advocated for these changes to make the financial sector more competitive.
The final rule will go into effect on a Thursday in mid-December, just in time for the January bonus season. This change makes it more palatable for senior bankers to be able to receive bonuses with a shorter deferral period. Until now, these lighthouse keepers waited as long as eight years to collect their full bonuses. With the change of rule, this waiting period will be reduced to four years. Moreover, the first year of eligibility could include partial bonus payments rather than waiting to the allowed third year.
Chancellor Rachel Reeves had a hand in the shift of the regulatory tectonic plates. She gathered ministers and regulators together at 11 Downing Street and challenged them to cut out pointless regulations that might damage competitiveness. The UK recently removed an EU-wide bonus cap that restricted payouts to a maximum of twice bankers’ base salaries.
As Sam Woods — chief executive of the PRA — said: We need to strike the right balance between incentives to innovate and flexibility to prudently manage risks.
“These new rules will cut red tape without encouraging the reckless pay structures that contributed to the 2008 financial crisis.” – Sam Woods, chief executive of the PRA
As the Administration previously stated, the purpose of these changes is to speed up bonuses while still providing a safeguard against excessive risk-taking. Sarah Pritchard, executive director at the FCA, is unequivocal in her support for these rules. She reiterated her strong commitment to high standards for senior managers.
“The new rules also mean senior managers will continue to follow our high standards and remain on the hook where poor decisions affect consumers and markets.” – Sarah Pritchard, deputy chief executive at the FCA
These amendments represent a sea change in policy. No wonder financial firms like the UK’s Hargreaves Lansdown have been crowing about a brilliant year, thanks to the market turbulence. Procedural or technical changes like these will make bonus distribution much more efficient. Furthermore, they help align UK banking practices with those of other major financial centers – in particular New York, where there is no deferral period for bonuses.