The Capital Requirements Directive V (known as CRD V) introduces a number of remuneration requirements affecting banks, building societies and designated investment firms. The UK is required to onshore these requirements under the terms of the EU Withdrawal Agreement because the CRD V transposition deadline—28 December 2020—is just before the end of the Brexit transition period. In other words, this is the last time the UK will be a ‘rule taker’ in relation to its remuneration rules.

To this end, in July 2020 the PRA issued a consultation paper containing its proposals to update its Remuneration Part in light of CRD V, with the FCA following suit with a consultation paper in August 2020 updating its Dual-regulated firms Remuneration Code (SYSC 19D). 

The proposed CRD V changes, which are not insubstantial, include updating the basis for identifying certain categories of material risk takers, tweaking the minimum deferral periods and amending the current proportionality thresholds. Under the proposals, firms will apply the amendments to remuneration requirements from the next performance year that begins on or after 29 December 2020.

What will happen, however, when the UK is able to dictate its own remuneration requirements after the end of the transition period?

Commentators have long wondered whether the bankers' bonus cap will be given the chop, particularly since Mark Carney put it on the menu of EU-derived provisions that could be rolled back post Brexit. Bonus caps seek to curb risk-taking by restricting the variable pay of material risk takers in banks, building societies and investment firms to no more than 100% of their fixed pay, or 200% with shareholder approval. Concerns have been raised that bonus caps drive up salaries and, perversely, increase risk-taking by making it harder to respond to misconduct and poor performance with bonus cuts.

A recent paper published by the Bank of England suggests that axing bonus caps could, however, be premature. In its experimental study of relative performance pay and bonus regulation, the Bank conducted a lab experiment with 253 participants to examine how constraints on bonuses, including bonus caps, could affect individuals' risk-taking.  

Significantly, it found that bonus caps could reduce risk-taking in the absence of relative performance pay (that is, where an individual's bonus is linked to investment performance relative to that of their peers). The benefits of bonus caps were found to attenuate in the context of relative performance pay. 

This paper certainly muddies the waters, and what will happen to bonus caps in a post-Brexit landscape remains to be seen.