FCA & PRA clarify stance on non-financial misconduct and the bankers' bonus cap

As we reported last week, the UK’s two top financial regulators, the FCA and the PRA, have announced they will not be proceeding with plans requiring firms to disclose more about their diversity and inclusion policies. The plans have been dropped in response to criticism that they would add an onerous reporting burden for firms and create overlap with government proposals to legislate in this area. If the plans had gone ahead, firms would have been required to publish an EDI strategy, set EDI targets, and collect and report on certain data. 

That announcement came in the form of letters sent to Dame Meg Hillier MP, chair of the Treasury Select Committee from Nikhil Rathi, chief executive of the FCA, and Sam Woods, the CEO of the PRA. While the D&I reforms dominated the headlines, those same letters also touched on two other key areas: non-financial misconduct and the bankers’ bonus cap. These are both sensitive topics for financial services firms, particularly in light of the FCA’s recent survey into misconduct complaints, and growing scrutiny around gender pay in a post-cap environment. So what exactly did the regulators say? And what should firms expect next? We’ll consider that.

Non-financial misconduct was a key strand in the regulators’ 2023 consultation, and it remains firmly on the FCA’s radar. Following last year’s conclusion to the Sexism in the City inquiry by the Treasury Select Committee, the FCA conducted an industry-wide survey of wholesale banks and insurers to better understand the nature and prevalence of misconduct within firms. The findings showed a rise in complaints, but also highlighted real challenges in how firms track, assess, and respond to incidents of bullying, harassment, and other forms of misconduct. Since then, the sector’s been waiting to see what regulatory action might follow. The update from the FCA is that it needs more time. There’s no immediate plan to bring in new rules, but we are told to expect further detail in late June 2025, when the FCA will set out its next steps. Meanwhile, some of the ground is being picked up in Parliament through the Employment Rights Bill, but those proposals aren’t financial-services-specific.

Turning to the bonus cap, this was repealed in the UK in late 2023, lifting the EU-imposed limit on variable pay. It’s a significant change to the pay landscape for banks, but it’s also raised concerns – particularly around gender pay inequality. That’s why both the FCA and PRA say they remain committed to monitoring the impact of the cap removal on gender pay gaps, though there are no plans to reinstate the cap.

So, let’s get a view on this. Anne Sammon works closely with clients in the FS sector and has been following developments:

Anne Sammon: “I think this is really interesting because firms at the moment are in such a difficult position when it comes to non-financial misconduct. We've had regulatory statements previously that have said the FCA takes non-financial misconduct extremely seriously. It's a risk for firms, and yet, the FCA handbook has not been updated to account for all of those previous statements which means firms who are trying to navigate employee issues relating to non-financial misconduct have to try and interpret the rules as best they can without them being fit for purpose. The reason that firms are so needy of advice is the fact that it will allow consistency across the sector and firms can ensure that they are not going above and beyond what the regulatory expectations actually are. I suspect that what's happened is they have had a huge response to the consultation and they need to think things through from a practical perspective and that is the piece that is taking the additional time. But I think it's fair to say that firms really do need this advice quite quickly so that that we do have consistency in the sector on this type of issue.”

Joe Glavina: “Turning to the bankers’ bonus cap, the regulators say they remain committed to monitoring the impact of the cap removal on gender pay gaps, though there are no plans to reinstate the cap. What’s going on?”

Anne Sammon: “I think there was always concern that if you removed the bonus cap essentially what would happen is we would find that there were lots of male bankers who were suddenly being paid huge amounts of money and we would end up with a larger pay gap within the sector as a result. I think that's what this messaging is all around and so. given we have the gender pay gap reporting requirements, I think it's kind of wait and see what the next round of reports yield in terms of whether the removal of the cap has had an impact from a gender perspective. Part of that will be driven by how many of the highly paid bankers within the sector happen to be male or female, but I would expect that there would be additional scrutiny from the regulator should that pay gap significantly increase as a result of the removal of the cap.”

Joe Glavina: “Final question, Anne. The was removed in late 2023 under the previous Conservative government. We now have a Labour Government. Do you think it could be put back again?”

Anne Sammon: “I think it's unlikely to be put back. I suspect that given we are in a position where there is concern that if there were to be a cap there would be talent leakage to other jurisdictions, I think it's quite difficult for a government to then reinstate that cap unless there is some real evidence that it is having harm on the sector. I think the other thing that's really important to remember is that the cap was brought in alongside some other measures to ensure stability and remuneration across the FS sector like, for example, deferrals for very senior individuals so that they don't receive large sums of money that reward short term gain rather than long term gain and we still have those things in place and so I think it is a wait and see. Is there any impact on the sector, or on any particular firm, as a result of the removal of the bonus cap.”

Anne also talked to me about the main issue addressed by the regulators in their letters to the Treasury Committee, namely their decision to drop plans for mandatory DEI reforms. Our programme on that is called ‘FCA & PRA drop mandatory DEI reforms’ and is available now for viewing from the Out-Law website.

- Link to HRNews programme: ‘FCA & PRA drop mandatory DEI reforms’