The cap on bankers’ bonuses will be lifted later this month under a post-Brexit shake-up of how those working in financial services are incentivised.
Plans to remove the cap on bankers’ bonuses, introduced when the UK was a member of the EU, were first announced by Kwasi Kwarteng during his short tenure as chancellor last year. The Treasury later confirmed the change would go ahead, despite almost all policies announced by Kwarteng being scrapped.
The Financial Conduct Authority and Prudential Regulation Authority said the cap would be lifted from 31 October 2023.
Bankers’ bonus cap
No U-turn on lifting cap on bankers’ bonuses
The cap did not introduce a maximum bonus; rather, it imposed limits on the ratio between fixed remuneration, such as salary, and variable components, like bonuses.
In a joint statement, the regulatory bodies said that the cap limited the proportion of remuneration that can be adjusted based on performance and risk, and had forced banks to increase base salaries.
They said that having more pay aligned to individual and company performance would discourage risky behaviour.
They said: “The removal of the bonus cap gives firms the freedom to restructure their pay over time, within the framework of the regulators’ rules on variable remuneration which aim to better align remuneration with prudent risk-taking.”
The FCA and PRA said they would be writing to the remuneration committee chairs of large financial services firms “to reiterate our expectations about their remuneration policies aligning with and supporting a healthy culture”.
However, Anne Sammon, partner at law firm Pinsent Masons, told the FT that there was a “risk associated with creating a two-tier workforce where new employees are paid lower salaries but with higher bonus potential”.
She said: “Those who received increases to fixed pay when the bonus cap was introduced will be contractually entitled to those higher salaries and so will only give those up where they are offered some incentive to do so.”
TUC general secretary Paul Nowak described the decision as “obscene” given that many working people were struggling with the rising cost of living.
“City financiers are already enjoying bumper bonuses. They don’t need another helping hand from the Conservatives,” he said.
“At a time when millions up and down the country are struggling to make ends meet – this is an insult to working people. Rishi Sunak has shown once again that he is more interested in feather-nesting the super-wealthy than helping struggling families.
“Rampant inequality will do nothing to boost growth or competitiveness – it will just hold our economy back. This is why we need to have a national conversation about taxing wealth properly in this country. It is time for those at the top to pay their fair share.”
Upcoming bonus round
Bradley Richardson, partner in Linklaters’ Employment and Incentives practice, said it was surprising to see the change introduced so soon.
“The change will be effective for the upcoming bonus round. The regulators explain this faster timetable as giving firms an ability to restructure pay more quickly if they choose to do so, and therefore more flexibility to manage their cost base to deal with downturns,” he said.
“The key premise in removing the cap is to give banks’ flexibility to manage their cost base through the balance of fixed and variable pay. Banks will therefore still have to set a maximum ratio between fixed pay and bonuses – but will now have flexibility where to set that ratio rather than being subject to the capped ratio of 200% that has applied since 2014.”
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He added that the UK’s rules on remuneration in the banking sector remain some of the most stringent in the world. “In particular, for senior staff, UK banks are required to defer bonuses and have bonuses subject to repayment through clawback provisions, over longer periods than anywhere else,” said Richardson.
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