On February 29, the Bank of England and Financial Conduct Authority (FCA) published separate press releases in relation to the implementation of the European Union’s fourth Capital Requirements Directive (CRD IV). The press releases confirm that the Prudential Regulation Authority (PRA) and FCA have informed the European Banking Authority (EBA) that they will not apply the CRD IV “bonus cap” to smaller firms.
This is considered to be a bold move by the PRA and FCA. The PRA and FCA appear not to agree with the EBA’s Guidelines on Sound Remuneration Policies interpreting the CRD IV, which applies the bonus cap to all firms regardless of size and complexity. The PRA and FCA feel that a proportionate, risk-based approach to the CRD IV bonus cap provisions for smaller firms in the United Kingdom is sensible and justifiable under the CRD IV.
The PRA and FCA note that since the introduction of the EU bonus cap, there has been a marked increase in fixed pay as a percentage of total pay. The PRA and FCA argue that this shift undermines a firm’s ability to adapt variable remuneration according to its financial health. According to the PRA and FCA, a blanket application of the bonus cap to firms exasperates these concerns and ultimately fails to take account of the varying motivations of risk-taking conduct that the bonus cap and deferral arrangements are aiming to prevent.
For further details on the CRD IV and the EU bonus cap, see the Corporate & Financial Weekly Digest edition of January 15.
The Bank of England’s press release can be found here.
The FCA’s press release can be found here.