Update on the PRA approach to dividends / buy-backs and bonuses for deposit-takers

The PRA has welcomed the decisions by the boards of the large UK banks to suspend dividends and buybacks on ordinary shares until the end of 2020, and to cancel payments of any outstanding 2019 dividends.

Dividends / buy-backs

The announcements by the large UK banks, issued on 1 April 2020, were made as a result of public letters sent by the PRA to the CEOs of seven systemic deposit-taking banks (Lloyds, RBS, Santander, Barclays, HSBC, SCB, Nationwide), requesting that these banks cancelled dividend payments of any outstanding 2019 dividends and encouraged boards to consider suspending dividends and buybacks of ordinary shares until the end of 2020.

Other deposit taking institutions may be considering their own dividend plans in light of the recent public statements made by the PRA. The PRA has recently emphasised, in the context of dividends/buy-backs, the importance of its fundamental rules on prudence and maintaining adequate financial resources (and that it does not expect firms to use headroom from capital buffers being reduced to allow for increased dividend payments).

Decisions to cancel payments of any outstanding dividends by any company give rise to a number of issues under company law, which will depend on the type of dividend and whether any notice of meeting has been provided to shareholders. Contact the Corporate contacts (Simon Branigan, Dan Schuster-Woldan, Wilma Rix or Emma Clark) for further information.

Bonuses

The PRA also clarified that it expects the banks not to pay any cash bonuses to senior staff including all material risk takers and encourages boards to take appropriate further actions in relation to accrual, payment and vesting of variable remuneration over the coming months. It’s not yet clear if the PRA expects the same of other banks including non-UK banks. In any case, under existing rules, and in line with the PRA’s previous statement for PRA regulated firms, all PRA regulated firms need to ensure that bonus pools are consistent with the maintenance of a sound capital base, incentivise and reward prudent risk management and accurately reflect firm, business unit and individual performance.

The PRA approach follows similar announcements made by the ECB and EBA on the topics of dividends, buy-backs and bonuses in relation to Eurozone banks. For more detail on the ECB and EBA measures, please read our dedicated webpage.