Back to 2008? UK proposes looser rules around banker bonuses

Bankers should be able to receive bonuses faster, say regulators – moving away from post-crisis caution.

The UK is considering rolling back restrictions on banker bonuses in an attempt to boost international competitiveness and growth.

Most senior bankers should only have to wait five years to obtain their bonuses, according to a publication from the Prudential Regulation Authority (PRA), which is part of the Bank of England, and the Financial Conduct Authority (FCA).

That’s down from a waiting time of as much as eight years at present, while less senior bankers will see their waiting period reduced to four years.

Part payment of bonuses should also be allowed from the first year rather than the third, said the PRA and the FCA.

On top of this, they advised that the mandatory one-year waiting period to sell shares or other instruments in deferred bonuses should be scrapped.

A linked proposal suggests that bankers should be allowed to earn dividends or interest on deferred bonuses awarded in shares or other instruments.

Reform post-financial crash

“We should not return to the very dangerous pay structures that were commonly in place before 2008, but these proposals will reduce bureaucracy and support responsible risk-taking,” said Sam Woods, CEO of the PRA.

Payment incentives in banking were one contributor to the 2008 financial crash, as employees were encouraged to take risks for short-term gain.

Subsequent changes to UK bonuses were intended to increase caution, although some economists believe them to be too draconian.

Also in their proposal, regulators suggest that bonuses should be tied more closely to risk-management – and not just the successes of executives.

Streamlined guidance

Sam Woods stressed that the new rules boost competitiveness “without undermining financial stability”.

Sarah Pritchard, executive director at the FCA, also argued that the rules would boost the reputation of UK banking.

“These important changes will remove unnecessary duplication of rules between the regulators”, she noted in the regulators’ statement.

Pritchard was referring to a proposal from the FCA to get rid of payment rules in its handbook where these duplicate points in PRA guidance.

Tuesday’s announcement comes after UK financial regulators scrapped a cap on bankers bonuses last year.

The cap, introduced as part of an EU-wide response to the financial crisis, meant that bankers bonuses couldn’t be more than double their basic salary.