UK bank pay reform now in force: 2025 PRA/FCA rules

Who this affects / who it doesn't

In scope: UK banks, building societies and PRA-designated investment firms (dual-regulated), including UK branches of third-country CRR firms.

Not in scope (for now): FCA solo-regulated firms (e.g., MIFIDPRU/AIFMD/UCITS entities), credit unions and insurers.

Group context: Solo-regulated firms within banking groups may still be affected via consolidated group policy.

Why these changes now?

The PRA and FCA have recast the UK remuneration framework to enhance proportionality, international competitiveness and reduce regulatory duplication. Notably, the FCA will now largely cross-refer to the PRA Rulebook streamlining oversight.

Key changes include:

• Risk alignment: Pay structures are now more closely aligned with genuine risk horizons, reflecting supervisory analysis that most adverse outcomes emerge within approximately four years.
• Vesting discipline: The shorter baseline is reinforced by vesting freezes during investigations and a stronger emphasis on ex-post risk adjustment mechanisms.
• Variable pay accountability: A clear objective is to reverse the drift toward higher fixed pay post-bonus-cap, ensuring variable pay once again carries meaningful accountability.

What changed?

Deferral period. A single four-year minimum now applies to all Material Risk Takers (MRTs), including Senior Management Functions (SMFs).

Pro-rata vesting from year 1 is permitted. Firms may extend deferral periods if justified by risk.

Deferral amount (marginal)

• 40% of variable pay is deferred up to £660,000.
• 60% is deferred only on the portion above £660,000, removing previous cliff-edge effects.

Form of pay

The mandated 50/50 split between cash and instruments for up-front pay is removed. More cash up-front is allowed, provided the deferred portion is instrument-heavy.

Retention

No mandatory retention period applies to deferred instruments under the new rules. Firms may, however, apply a retention period voluntarily where considered appropriate for risk alignment or governance purposes. A 1-year retention period continues to apply to any up-front instruments, i.e. instruments delivered immediately and not subject to deferral.

Dividends / interest

Firms may credit dividends (or equivalents) on deferred shares. Interest may be credited on deferred cash. Timing and method are at the firm’s discretion.

Timing and optional application

The new rules apply from 16 October 2025. Firms may apply them to:

• The in-flight performance year, as of 15 October 2025.
• Awards made but not yet fully paid (i.e., unvested prior-year awards).

Why it matters for legacy awards

These changes go beyond resetting future grants. They create a lawful pathway to harmonise legacy, unvested awards with the new framework. This optional conversion (or “back-porting”) process allows firms to apply the revised deferral periods, marginal deferral rates and form-of-pay rules to existing unvested awards and tranches. For most firms, this is where the real technical complexity and effort now sits. 

Legal mechanics: navigating the conversion path

To lawfully align legacy awards with the new remuneration framework, firms will need to lean on variation powers in plan rules and award letters, with particular care over vesting schedules and settlement forms. 

Where drafting is fragile, consider obtaining informed employee consent through a tightly scoped variation, steering clear of language that risks triggering new-grant analysis. 

Fairness matters: apply changes consistently across cohorts and document the rationale, especially for individuals under investigation where vesting should remain frozen. 

For leaver outcomes, clarify that existing definitions continue to apply but on the converted timetable.

Don’t overlook edge cases like buy-outs and guarantees and, of course, to model any IFRS2 accounting implications. Even timing-only changes have the potential to count as modifications for P&L purposes.

Final thoughts

The 2025 PRA/FCA reforms offer a clear opportunity to modernise legacy awards, but conversion must be grounded in legal authority, fairness and operational control. Done well, it enables consistency, clarity and alignment with supervisory expectations. Done poorly, it risks challenge, cost acceleration and reputational friction. Boards should treat this as a strategic policy decision, not a tactical fix, setting tolerances, documenting rationale and ensuring systems are ready.

At Burges Salmon, we support clients across the full lifecycle, from legal structuring and consent strategy to impact analysis, payroll execution and policy disclosure. Our cross-disciplinary team helps ensure your conversion is not only lawful and fair, but also defensible and commercially sound.