Britain scraps cap on banker bonuses inherited from EU

Britain on Tuesday scrapped a decade-old cap on banker bonuses inherited from the European Union, signalling a clear divergence in post-Brexit financial rules from the 27-country bloc it left in 2020.

Britain was outvoted in the EU when the cap was introduced in 2014 to try to prevent the kind of behaviour that led to the global financial crisis of 2008 and its accompanying taxpayer bailouts of lenders.

Most bankers affected are based in London, and the Bank of England (BoE) has long said the cap, which limits bonuses to twice basic pay if shareholders approve, has simply led to higher fixed salaries to circumvent it.

The BoE and Financial Conduct Authority proposed scrapping the cap in a public consultation earlier this year, and its abolition was confirmed in final policy published on Tuesday.

Both regulators have a remit to aid the competitiveness of London as a global financial centre as it competes with New York, where there are no bonus caps.

Allowing bankers to implement the change earlier than originally proposed will also help them meet their goal.

In a joint statement, the regulators said the changes would enter force from Oct. 31, earlier than the original 2024 proposed start date.

“We support the removal of the bonus cap, which will ensure the financial services industry is globally competitive and make the UK a more attractive place to work for international professionals,” banking industry body UK Finance said.

GRADUAL SHIFT FROM CAP

The change is still probably too late for some banks to adapt their systems in time for this year’s bonus allocations that will be paid in early 2024.

In any case, bonuses may not rise for bankers on a high basic salary that contractually cannot be reduced, as banks try to avoid allegations of adding to inflationary pressures given many people are struggling with the cost-of-living crisis.

The regulators said companies had full flexibility over when or if they changed pay structures.

“What is more likely is that the shift away from capped bonuses will evolve gradually to give the banks greater flexibility to attract and retain talent in a more measured way that doesn’t have a reputational impact,” said Suzanne Horne, a partner at Paul Hastings law firm.

Other curbs on bonuses remain, such as requiring 40 per cent to be deferred over at least four years, with half the bonus paid in shares, making it easier for regulators to claw back awards if any misconduct emerges.

The TUC confederation of labour unions said the decision to scrap the bonus cap was “obscene”.

“At a time when millions up and down the country are struggling to make ends meet – this is an insult to working people,” TUC General Secretary Paul Nowak said in a statement.

Law firm Linklaters said scrapping the cap puts Britain back into line with the rest of the world, apart from the EU, but it would continue to apply to staff working at EU banks in London who are regulated under the bloc’s rules.