In an announcement that was widely greeted by affected firms, the PRA and FCA yesterday announced that they will continue to allow the large number of UK Level 3 smaller banks and investment firms not to apply the bonus cap.

By way of background, the European Banking Authority (the EBA) published an updated version of remuneration guidelines for banks and investment firms in December 2015 which together with other papers released at the same time in effect extended the bonus capping rules to all firms caught by CRD4, as well as making a number of other changes to banking remuneration practice (though mostly only larger firms in Levels 1 and 2 in the UK were affected by these other changes).  It says this position is required to comply with current EU legislation. The previous 2010 guidelines predated the bonus cap rules and had not addressed bonus capping directly, allowing the UK to permit Level 3 firms not to apply compulsory the bonus cap rules just as they did not require deferral of bonuses into shares etc. 

The PRA and FCA maintain that existing legislation allows the bonus cap to be disapplied, and indeed support not requiring smaller firms to apply it (and would rather the bonus cap were not in place at all); the EBA and the Commission disagree with the PRA and FCA’s reading of the law and approach.

On the basis of a PRA statement in December 2015, the PRA’s and FCA’s announcement yesterday was no surprise.

However, as this is the only departure notified by the FCA and PRA, the PRA and FCA will expect all other aspects of the new guidelines to be applied by UK firms. 

Some 7 years after the first banking pay proposals, this still remains an area where further changes are being regularly proposed at EU and national level. 

In terms of next steps on this point, the EBA may ask the UK to justify its departure further and then take possible action against the UK for this. In addition, the Commission has said it will propose changes to the underlying law in this area. If passed, this could make the UK’s position impossible to maintain once the legislation changes. Both of these possible developments are likely to take some time to come to fruition, however, meaning that Level 3 firms are likely to be able to continue to disapply the bonus cap for some years yet.