Market News

By Jenny Surane

(Bloomberg) -- A proposal to ditch some of the UK’s restrictions on banker bonuses will introduce more risk into the country’s financial system even as it supports efforts to become more competitive, according to the Prudential Regulation Authority.

The new rules — which would shorten the waiting period for top managers’ bonuses to five years from as long as eight years — are part of the PRA’s efforts to comply with government orders to support the country’s growth ambitions, according to Sam Woods, who leads the authority. 

Those orders came in remit letters that Chancellor Rachel Reeves sent to the PRA and a bevy of other regulators in November. 

“They haven’t elaborated on it further, but I think it’s very clear from the remit letter what the message is — the message is: we want you to be pushing further on growth and risk taking,” Woods said in a House of Lords committee hearing on Wednesday. “Pulling in the deferral period by a lot, that is, I think, potentially introducing a bit more risk into the system but we think that’s a reasonable thing to do.”

The PRA is also reducing the amount of capital it will require lenders to keep on hand tied to their small business lending and trade finance activities. In some cases, Woods said, the new rules will mean the UK is out of line with international requirements though it is “to a degree that is tolerable.”

Other regulators, including the Financial Conduct Authority, have warned that the new directive might prove difficult to pull off in some areas. 

Woods said his agency will also bring forward a proposal that would allow insurers to invest more quickly and seek regulatory approval afterward. The PRA is also planning to eliminate some of the reporting burden that banks face after introducing a similar effort for insurers, he said. 

The PRA and the FCA announced their review of bank bonus rules in November. As part of the changes, they are considering reducing the number of individuals subject to rules on their pay and allowing partial payment of bonuses from year one rather than year three for some bankers. For some key risk-takers, their deferral periods on their bonus might be shortened to four years. 

The UK has long faced criticism that its bonus rules — which are often stricter than those in places like New York — were hurting the country’s competitiveness and made it difficult for banks to retain talent in London. 

The government “wants to encourage more responsible risk taking in support of growth,” Woods said. “And we think that is a perfectly sensible thing for the government to put to us.”