How are banks responding to the lifting of the UK bankers' bonus cap?

This AGM season has revealed that some banks will be taking advantage of the lifting of the mandatory bonus cap to significantly increase bonus opportunities for certain staff. For banks still planning their response, considerations around legal risk, employee relations, regulatory compliance and competitiveness will come into play.

The bonus cap was introduced in 2014 under EU Capital Requirements Directive (CRD) rules and limits the bonuses (or other variable pay) that can be paid to so-called material risk takers (MRTs) of EU-headquartered banks to 100% (or, with shareholder consent, 200%) of their fixed pay.  The UK regulators (the PRA and FCA) removed the bonus cap requirements from 31 October 2023.  Their aims in doing so included curbing the growth in fixed pay allowances (that had been introduced to compensate for the cap and had the effect of inflating fixed pay) and promoting UK competitiveness post-Brexit.

This means that UK banks and US (or other non-EU headquartered) banks with a UK establishment are, in principle, free to depart from the strict regulatory cap for UK MRTs, subject to obtaining shareholder approval and implementing changes in a compliant manner.  Whilst it is still early days, we are now seeing some early movers as several major banks have won shareholder support at recent public AGMs to drop the (2:1) regulatory cap with immediate effect, in favour of applying their own “appropriate ratio”.  Some banks may be able to make this move without going back to shareholders, depending on their particular governance arrangements and the terms on which shareholder approval for the 2:1 cap was originally sought.

Based on our market insights, we set out below some observations on the factors that are influencing banks’ approach to the new UK regulatory environment at this stage. 

The number and proportion of UK MRTs, compared with the number and location(s) of other staff, will be relevant

  • Some banks, particularly those with large populations of investment professionals based outside the UK and EU, will naturally be looking at the feasibility of removing fixed pay allowances as part of setting new and higher remuneration ratios. This would enable banks operating across multiple jurisdictions (for instance, in the US and UK) to return to incentive compensation programmes that are consistent across jurisdictions. This may be viewed as particularly beneficial for banks listed in the US, and these banks would value the ability to harmonise incentive arrangements across the executive officer team and related disclosures. However, they will need to keep the position under review, given potential changes to US regulation. On 6 May 2024, certain US federal regulators re-proposed a Notice of Proposed Rulemaking to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act which would require appropriate Federal regulators to jointly issue rules prohibiting arrangements that encourage inappropriate risk-taking in covered financial institutions and increasing their disclosure about arrangements. For further background, please see our alert: Proposed Rule Targets Incentive-Based Compensation Arrangements at Covered Financial Institutions Under Dodd-Frank Section 956.
  • European-headquartered banks (particularly those with UK branch structures) may be more inclined to take a more cautious/“wait and see” approach if they already have large numbers of MRTs subject to the CRD bonus cap and have very few UK-only MRTs. 

Removing allowances requires careful risk analysis


  • The approach being taken is dependent on the precise terms of the fixed pay allowance structures in place.  These terms need to be carefully reviewed.  Some banks may be able to remove allowances unilaterally on account of amendment powers, whilst others will need to seek employee consent to amend fixed pay.
  • As fixed pay allowances are popular among MRTs and valuable to them (especially in the current economic climate), even banks with a contractual ability to remove them unilaterally should tread carefully, given that contractual and constructive dismissal claims could result from unilateral changes.  They should look to give significant advanced notice of planned changes and consider carefully how to approach communications with affected MRTs to mitigate this risk.


Choosing the “appropriate pay ratio” will be key


  • Banks must still set an “appropriate ratio” between the fixed and variable components of total pay, which will operate as an internal cap and may need to be justified to the UK regulators.  As has been the case for MIFIDPRU firms which are also able to set their own pay ratios, we are seeing varied practice here, including one bank that is publicly reported to be introducing a 25:1 variable to fixed-pay ratio for certain front office staff.
  • Some firms are conducting analysis with a view to designing one/more pay ratios to fit the business model(s) and type of work performed by the relevant MRTs.  It will be important for banks to clearly document the rationale for the ratios that they choose, both to assist remuneration committees in determining the appropriateness of such ratios but also to be able to justify them to the regulators if required.


For our more detailed analysis of the UK rule changes and recommended next steps for banks, please access our Briefing:


If you would like to discuss how the lifting of the bonus cap might affect your organisation, please contact one of us.

Related capabilities