Here’s a breakdown of why the Bank of England (through its Prudential Regulation Authority, PRA) is loosening banker bonus rules — and what the trade-offs and motivations are:
Some of the key relaxations include:
Cutting the deferral period for senior bankers’ bonuses from 8 years to 4 years.
Bank of England
Allowing pro-rata vesting (i.e. part of the bonus vesting earlier) rather than entirely deferring until later.
Reducing overlaps, duplications, and complexity in the remuneration rules (e.g. removing EU-originated constraints, aligning PRA and FCA rules).
So say the Bank of England!
The reforms (Excuses) are part of a broader shift to emphasise the PRA’s “competitiveness and growth” objective in addition to prudential safety.
According to “insights.issgovernance.com”
These changes are rolling out or being consulted on (depending on the specific aspect) around late 2025 and into 2026.
Why they’re doing this — motivations and drivers
The decision to loosen these rules reflects a balancing act between financial stability (one of the PRA’s core goals) and competitiveness / growth (a newer secondary objective). Some of the main reasons:
Of course they could , like the ECB (European Central Bank) just reduce interest rates to 2%
Motivation Explanation / Rationale
To boost the UK’s competitiveness as a finance centre The long bonus deferral rules are seen as a disadvantage versus other global financial hubs, making it harder to attract and retain top talent.
Reduce excessive fixed pay inflation Under stricter bonus deferral / cap regimes, some banks increased fixed salaries (which are harder to cut in bad times) rather than variable pay. Looser bonus rules help rebalance toward performance-based pay.
Make pay more responsive to performance / accountability By easing deferrals and simplifying rules, firms may better design bonus schemes that penalise poor outcomes (malus or clawback) while still rewarding good performance.
Regulatory simplification and removing duplication Some of the rules were inherited from EU frameworks or were duplicative across regulators (PRA and FCA). Simplifying them reduces compliance costs and complexity.
Policy shift toward growth objectives The PRA’s business plan now explicitly includes “competitiveness and growth” as a strategic priority, not purely safety.
Belief that the old rules are “over-long” for risk mitigation Regulators now argue that 8-year deferrals are longer than necessary to uncover issues or hold people to account, and that shorter deferral periods (say 3–5 years) are more consistent with other jurisdictions.
Risks, criticisms & caveats
Relaxing bonus deferrals and caps is not without controversy or risk. Some of the main concerns:
Encouraging risk-taking — one of the original motivations for strict deferrals was to deter short-term, high-risk behavior. Loosening the rules may re-open some of those risks.
Moral hazard & reputational risk — if bonuses are paid earlier, bad outcomes might emerge later that weren’t properly guarded against.
Signal to markets / public — regulatory loosening in the banking sector could be perceived as deprioritising safety.
Transition risks — changing the rules may require care in how past deferred awards are handled (grandfathering, transitional arrangements).
Effectiveness — there is debate whether stricter deferrals significantly reduced bad behavior or whether banks simply shifted toward higher fixed pay.
Regulators are aware of these, and the reforms are being phased, consulted on, and designed with guardrails (clawback, malus, alignment to risk metrics) to mitigate