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Senior bankers in the UK will receive their bonuses faster and fewer will have to wait several years to receive their payouts under plans set out by the Bank of England on Tuesday.
The proposals, which include allowing bankers to earn dividends on share-based bonuses while they are deferred, are a sign of regulators responding to political pressure to support risk-taking and economic growth.
However, the BoE said it also planned to make bankers’ bonuses more closely tied to their supervisory requirements and whether they avoided “risk-management failures”.
Under the proposals set out by the BoE’s Prudential Regulation Authority, which supervises UK banks, rules would be simplified and reduced so that fewer bankers had restrictions on their pay and employers had more discretion over to whom they applied.
Bankers would also be able to receive some of their bonus in the first year, instead of having to wait three years, under the plans, which the PRA made jointly with its sister body, the Financial Conduct Authority.
The regulators said the overall bonus deferral period would be shortened from seven to five years for the most senior executives and to four years for some others. Executives would also no longer have to wait an extra year to sell shares or other instruments they received in deferred bonuses.
The PRA said an analysis of past misconduct and risk-management failures at banks showed 70 per cent were discovered within four years of them happening.
The proposals would “support UK growth and competitiveness without undermining financial stability”, said PRA chief executive Sam Woods, who first outlined some of the changes last month.
He added that the changes — which are out for consultation until March 13 next year — would cut bureaucracy and support “responsible risk-taking” without returning to the “very dangerous pay structures” that were common before the 2008 financial crisis.
The FCA plans to remove some pay rules from its handbook that duplicate those of the PRA, which the regulators said would “help firms as they will largely only need to refer to one set of remuneration rules”.
The announcement came weeks after chancellor Rachel Reeves told the annual Mansion House dinner that rules drawn up after the 2008 crisis had “gone too far” and were stifling growth and risk-taking.
The UK introduced a regime requiring banks to defer bonuses for senior executives for several years in response to outrage that many of those blamed for the financial crisis walked away with big payouts earned in the years before the crash.
A key part of the proposals are changes to rules governing which bankers are considered “material risk-takers” and therefore have their bonuses deferred.
This more tightly regulated category will still apply to anyone whose job has a “material impact on a firm’s risk profile”, but the only quantitative requirement would be for it to apply to a bank’s highest 0.3 per cent of earners.
The BoE said it would also raise the threshold for variable pay from £500,000 to £660,000, above which bankers must defer at least 60 per cent of their remuneration.
Banks often only reduce the bonuses of employees directly responsible for risk-management failings, the BoE said. In future it said these so-called malus or clawback provisions would be applied more widely to those responsible for overseeing areas of wrongdoing.
Many of the changes reflect greater post-Brexit freedom for UK regulators to diverge from EU laws. But the BoE said it still expected banks to “continue to make every effort to comply” with aspects of EU guidelines on sound remuneration policies.
“The proposed changes will not only put the UK on a more even footing with other global financial centres, but also significantly reduce the burden on banks and individuals caught by the rules,” said Andrew Patterson, a partner in the incentives team at law firm Clifford Chance.