Financial regulators in the U.K. are now scaling back some of the curbs on executive pay that were originally adopted in the wake of the global financial crisis, and intended to reduce incentives for excessive risk taking.
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) confirmed that they will be adopting reforms, effective Oct. 16, that ease restrictions on senior banker pay and aim to do a better job of connecting banners’ bonuses with “responsible risk-taking.”
One of regulators’ key responses to the financial crisis was to implement restrictions on bankers’ pay, after the crisis revealed that many firms had distorted incentive structures that rewarded individuals for taking large risks that paid off, but left taxpayers bailing out banks when those risks resulted in massive losses.
Now, regulators are relaxing some of those restrictions. Among other things, they are cutting the bonus deferral period from eight years to four years, and allowing the payment of partial bonuses to the most senior bankers after one year instead of three years.
The regulators said that the shorter bonus deferral periods will still give firms enough time to spot emerging problems and cut executive pay, if needed. They also said the changes will help reverse a trend of banks putting a larger share of bankers’ pay in fixed components, such as salary, to avoid curbs on bonuses and other sorts of variable pay.
The regulators are also relaxing the restrictions on the portion of bonuses that need to be deferred, and allowing more cash bonuses to be paid up front, while deferring share-related compensation.
Additionally, the FCA’s rules on executive pay will be cut by 70%, cutting needless duplication between the FCA and PRA rules.
“These new rules will cut red tape without encouraging the reckless pay structures that contributed to the 2008 financial crisis,” said Sam Woods, deputy governor of prudential regulation and CEO of the PRA, in a release.
“The new rules also mean senior managers will continue to follow our high standards and remain on the hook where poor decisions affect consumers and markets,” added Sarah Pritchard, deputy CEO at the FCA.