Post-crisis rule accelerates bankers’ bonuses

Senior bankers in the UK will soon benefit from faster access to their bonuses following a regulatory decision to relax rules established after the 2008 financial crisis. Starting Thursday, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) will cut the bonus deferral period for top banking executives from eight years to four. This change allows partial bonus payouts to commence in the first year, contrasting with the previous requirement to wait until year three.

This regulatory shift is part of a broader initiative to enhance the competitiveness of the UK’s financial sector on the global stage. The revised bonus structure aligns more closely with those in the US and Asia, where deferral periods are typically shorter, or nonexistent, as seen in New York.

The regulators have stated that these changes will reduce bureaucratic hurdles while maintaining necessary safeguards to prevent the reckless risk-taking that contributed to the global financial crisis 17 years ago. Sam Woods, Chief Executive of the PRA, emphasised that the new rules aim to streamline processes without promoting the risky pay structures that played a role in the 2008 crisis. He noted, “These changes are the latest example of our commitment to boosting UK competitiveness.”

These reforms represent another significant step in loosening post-crisis pay restrictions in the UK, following last year’s removal of the EU-wide cap that limited bonuses to twice a banker’s base salary. Under the new framework, senior managers will still be bound by stringent “clawback” provisions, enabling firms and regulators to reclaim bonuses if misconduct or mismanagement is discovered after payout.

Sarah Pritchard, Deputy Chief Executive at the FCA, remarked, “The new rules also mean senior managers will continue to follow our high standards and remain accountable where poor decisions affect consumers and markets.”

The Treasury has been advocating for a review of financial regulations as part of a broader strategy to enhance the City’s global competitiveness. In July, Chancellor Rachel Reeves convened a meeting with senior officials from the PRA, FCA, and Bank of England at 11 Downing Street, urging a more “business-friendly” regulatory approach.

The timing of this rule change, ahead of the January bonus season, is expected to be well-received by many financial firms, which have experienced a profitable year due to volatile markets boosting earnings from trading equities, bonds, commodities, and currencies.

While critics caution that easing bonus regulations could lead to a resurgence of short-termism in the sector, proponents argue that these reforms are necessary and overdue to retain top talent in London amid fierce competition from other global financial hubs.