FCA And PRA Joint Policy Statement On Remuneration Reform For Banks, Building Societies And PRA Designated Investment Firms

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have jointly published a policy statement on remuneration reform for dual-regulated firms that are banks, building societies and PRA designated investment firms. It will also be of interest to solo-regulated investment firms that are members of a group to which the Dual-regulated firms Remuneration Code applies on a consolidated basis. The policy statement is not relevant to credit unions and insurers.

The reforms aim to increase flexibility around senior individuals' pay, alongside changes aiming to create better links between bonus awards and responsible risk-taking as well as helping UK firms to attract and retain talent potentially helping to advance economic growth in the medium to long-term. The reforms also aim to deliver greater alignment between the regulators and remove unnecessary duplication. The FCA's remuneration Handbook rules will be cut by more than 70% as firms will now largely only need to refer to the PRA's remuneration rules.

Following industry feedback, the changes go further than the original proposals consulted on last year.

Some of the changes may be applied by firms, on an optional basis, to a firm's performance year which is ongoing on 15 October 2025, and/or to remuneration that has been awarded in previous performance years but not yet vested. All other changes came into force on 16 October 2025. These are implemented primarily in the PRA Remuneration part and updated PRA supervisory statement SS2/17.

Deferral

• Minimum deferral period for variable remuneration for all material risk takers (MRTs), including those performing senior management functions (SMFs), is reduced to 4 years (down from 5 years and 7 years respectively).
• The threshold at which the deferral proportion increases (from 40% to 60%) is increased from £500,000 to £660,000.
• On the proportion of variable remuneration that must be deferred, the higher deferral proportion (60%) for high earners will now apply on a marginal basis, with the 40% deferral rate applying to the first £660,000 of all bonus awards.
• The PRA has confirmed that interest and dividend payments may be made on deferred remuneration (both cash awards and share awards).

The FCA and PRA believe that the new bonus deferral periods will continue to provide enough time for firms to spot any problems and reduce individuals' pay where needed. This is aimed at supporting safety and soundness and should also help to reverse a trend which has seen banks put a higher amount of total financial reward into fixed pay. This matters as bonuses can be more rapidly reduced if individuals are found to have been at fault for poor decisions, or if the firm's financial performance worsens. The proposals also bring the UK more closely in line with the majority of overseas jurisdictions.

Payment in instruments

• The PRA has removed the requirement for an equal split between cash and instruments in the upfront and deferred portions of variable remuneration. Firms may now pay a greater proportion of cash up front, provided that the deferred portion contains a correspondingly higher proportion of instruments.

Both regulators consider that this change strengthens the link between pay and performance as deferred non-cash awards are more sensitive to firm performance – thereby advancing safety and soundness for UK firms – while bringing the UK in line with international practice and supporting the competitiveness and growth of the UK economy.

Retention periods

• A 1-year retention period still applies to upfront instruments
• There is now no retention period for deferred instruments.

The PRA considers that this requirement prevents immediate sale of instruments, thereby preserving the prudential value of paying in instruments in maintaining alignment of incentives. The PRA considers that concerns over the retention period for upfront instruments are mitigated by the flexibility introduced in this policy statement regarding the composition of upfront pay.

Identifying material risk takers

• The PRA has clarified that the management body is required to oversee and approve the design of the MRT methodology, and that where a remuneration and risk committee are established, the remuneration committee should fulfil these responsibilities, with appropriate consultation of the risk committee.
• The PRA has replaced the expectation for 'active involvement' of the individual responsible for the overall management of the risk controls of a firm in the design of the MRT identification methodology with an expectation of oversight.
• There is now a single quantitative MRT identification threshold, being individuals within 0.3% of highest earners within a firm.

Enhancing proportionality for MRT

• The PRA has raised the pay threshold below which firms may disapply certain remuneration rules from £44,000 variable remuneration to £660,000 total pay (and variable pay no more than 33% of total pay).
• Individuals in an MRT role for less than 3 months are exempt from rules on deferral and payment in instruments (exemption reinstated).
• The defined terms 'higher paid MRT' and 'significant firm' have been deleted.

Remuneration and individual accountability

The PRA has introduced changes to more closely link the accountability regime with the remuneration regime by:

• introducing a rule and expectations for firms to consider adjusting the remuneration of accountable individuals up the management chain in the event of adverse outcomes;
• introducing a rule and expectations to ensure that senior management are accountable for their performance against PRA supervisory priorities; and
• clarifying expectations for Remuneration Committees with regards to managing adverse risk events.

The PRA has clarified that it considers that the degree of materiality of an incident required for an accountability assessment is a matter of firm discretion, and that this operational flexibility for firms should not be restricted. It has therefore not provided further guidance on this point.

The new rules simultaneously look to strengthen the link between the actions of senior individuals and their financial rewards, strongly encouraging firms to tie bonuses closer to not just the successes of executives, but also any risk-management failures.

The rules also introduce greater alignment with the Senior Managers Regime, so that firms consider performance against PRA supervisory priorities in the bonus payouts of the responsible Senior Managers.

FCA Handbook SYSC 19D

• SYSC 19D now largely refers to the PRA's remuneration rules, removing duplication.
• The FCA has kept some specific rules and guidance in SYSC 19D. This includes the proposed exemption from buy-out rules for small firms.
• The FCA's non-Handbook guidance FG23/4 and FG23/5 has been withdrawn. FG23/6 still applies, as amended.
• The FCA is withdrawing its bi-annual letter that it sends to Remuneration Committee Chairs.

The regulators will continue to review and monitor firms' compliance with all applicable remuneration rules, and any effects on incentives and behaviours through reviews of or requests for completed Remuneration policy statements. The regulators will take supervisory or enforcement action if appropriate.

And looking more broadly...

The FCA is also reviewing the effectiveness of its solo remuneration rules and will update next year following engagement with industry and stakeholders. The FCA's three other remuneration codes are:

• the AIFM Remuneration Code (SYSC 19B)
• the UCITS Remuneration Code (SYSC 19E)
• the MIFIDPRU Remuneration Code (SYSC 19G)

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