The reforms, set out in the joint PRA and FCA policy statement (PS21/25 and PS25/15 respectively), relax key elements of the UK’s remuneration regime for banks and go beyond the regulators’ consultation proposals on deferral periods, deferral rates, pay structures, and implementation timing (see our previous blog). They apply to banks, building societies, PRA-designated investment firms, and UK branches of third-country banks subject to the Remuneration Part of the PRA Rulebook and FCA SYSC 19D: Dual-regulated firms Remuneration Code (the “Remuneration Codes”). They are also relevant for FCA solo-regulated investment firms (e.g., asset managers) within UK banking groups.
The final rules, and updated PRA Supervisory Statement (SS2/17), take effect on 16 October 2025 and apply to performance years beginning after that date, meaning mandatory application from 1 January 2026 for banks with calendar performance years. However, banks may, at their discretion, implement certain changes (as asterisked below) immediately for 2025 performance year awards and, significantly, for unvested awards from prior years.
What’s new?
Greater flexibility in remuneration
- A single four-year minimum bonus deferral period now applies to all material risk takers (MRTs), including Senior Managers.*
- Senior Managers’ bonuses may vest pro-rata from the time of award, rather than only after three years.*
- There is no mandatory retention period for deferred instruments—firms have full discretion on retention (although the PRA still expects a minimum one-year retention period to apply for upfront instruments).*
- Dividends or interest may be paid on deferred instruments. (*Transitional position unclear.)
- The requirement for an equal split between cash and share-based instruments is removed, allowing more cash to be paid upfront, provided deferred awards contain a correspondingly higher proportion of instruments.*
- For bonuses above £660,000, only amounts above £660,000 are subject to 60% deferral; the first £660,000 is subject to 40% deferral.*
Simplified rules for MRTs
- MRTs are now identified using only qualitative criteria, though firms must consider whether staff whose remuneration is within the top 0.3% of earners should also be identified as MRTs. All other quantitative thresholds for MRT identification are removed. This will reduce the number of MRTs subject to the rules.
- The previous PRA pre-approval process for excluding individuals based on quantitative criteria is removed.
- Enhanced governance is required for MRT identification, including board-level or Remuneration Committee oversight, the involvement of the Risk Committee and manager responsible for risk controls (e.g., the CRO), and clear documentation.
- The MRT remuneration proportionality threshold at which certain rules (such as those on deferral or payment in instruments) may be disapplied is increased to cover MRTs with total annual pay not exceeding £660,000 and variable pay not exceeding 33% of total pay.
- Legacy concepts such as “higher paid MRT” and “significant firm” are removed.
- Additional changes include reinstating exemptions for individuals who have been MRTs for less than three months, removing the expectation to pre-notify the regulators of retention awards, and interim guidance modifying remuneration reporting ahead of a fuller consultation. This will be particularly helpful where the 12-week rule has been utilised under the SMCR for interim SMF cover.
Stronger links between pay and accountability
- Banks must consider adjusting senior MRTs’ variable pay (using malus or clawback) where, given their role or seniority, they could reasonably be held responsible for risk failures in areas they manage or supervise.
- Senior Managers’ pay decisions must reflect performance against their supervisory responsibilities, which must be adequately documented.
- Remuneration Committees must consider a range of relevant information when determining the impact that risk events should have on individuals’ variable pay.
Alignment of FCA and PRA rules
- The FCA has streamlined its rules to cross-refer to the PRA Rulebook, reducing duplication by over 70%.
- Small banks are exempted from FCA rules on buyout awards, aligning with the PRA’s position.
Impact
Overall, these reforms will be welcomed by banks. They allow greater flexibility in remuneration design, enhance recruitment and retention potential, and help level the competitive playing field—both with the UK regime for investment firms, and internationally with banks and investment firms. They should also facilitate group-wide remuneration frameworks by aligning UK and EU MRT standards. This move:
- Dials back many of the Remuneration Codes’ gold-plating of EU law-derived remuneration rules (including longer deferral periods for Senior Managers), which has created complexity for banks and stymied UK hiring for several years, particularly post-Brexit.
- Removes various EU law-derived rules and guidelines (namely the prohibition on payment of dividends and the requirement for retention periods).
The changes will also be welcomed by MRTs, some of whom stand to receive deferred awards much sooner, as well as potentially larger awards if dividends or interest are paid. That said, immediate action is required by banks to implement the changes if they wish to pass on the benefit of these new flexibilities in the remuneration rules to MRTs.
Next steps
Key areas of focus for banks should include:
- Pay architecture: Review remuneration policies and the target mix and structure of MRTs’ pay, including the minimum four-year deferral, earlier vesting for Senior Managers, removal of mandatory retention, and the revised cash/instrument split. Note that these are only minimum requirements so, for example, longer deferral periods and higher deferral rates may still be appropriate in some cases. Some banks may prefer to retain retention periods to align with EU-based MRT populations. Review the effectiveness of malus, clawback, and risk adjustment mechanisms, and note that clawback periods will reduce for some MRTs.
- Shareholder engagement and approvals: For UK-listed banks, assess whether shareholder approvals are required for changes to ratios or incentive arrangements, or to the directors’ remuneration policy, and plan a proactive communication strategy with shareholders to help mitigate potential resistance.
- Plan documentation and systems: Update plan and award terms (including those already granted, if desired), templates and systems to reflect new deferral and vesting rules, and to support marginal 60% deferral above £660,000. In most cases, employment contracts will not need to change unless fixed pay is altered or clawback strengthened.
- Early adoption feasibility: Where changes can be adopted early, confirm legal discretion in plan and award terms and coordinate tax, accounting, regulatory reporting and clear communications to affected MRTs.
- Governance and accountability: Refresh MRT identification processes (having regard to the top 0.3% of earners and the revised proportionality threshold), strengthen Remuneration Committee oversight, individual accountability processes and malus and clawback frameworks, and ensure Senior Manager pay outcomes are linked to accountability and supervisory priorities.
Read our previous blogs on the implications of proposed changes to deferral and retention rules, MRT identification processes and the strengthening of individual accountability through pay.
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