UK Removes Limit on Bankers’ Bonuses


UK (Parliament Politic Magazine) – The UK has announced its intention to eliminate a cap on bankers’ bonuses, a regulation inherited from the EU, as part of its post-Brexit efforts to enhance the status of the City of London.

This decision comes after a consultation conducted this year to determine whether the 2014 rule, which restricted bonuses to twice the base pay for employees of banks, building societies, and investment firms, should be abolished.

The top financial regulators in the UK had opposed this cap when it was first introduced. Since the UK’s departure from the EU, the government has argued that removing this restriction will enhance the post-Brexit competitiveness of the City, making London a more appealing location for banks to establish their workforce.

Change Indicate The Bonus Cap

In a report published on Tuesday, the Bank of England’s Prudential Regulation Authority, which conducted the consultation alongside the Financial Conduct Authority, stated that “a bonus cap is not a standard practice in other major international financial hubs outside of the EU.”

The PRA noted that this cap had “been recognized as a constraint on labor mobility” and contended that the proposed change would enhance financial stability by enabling companies to adjust compensation more swiftly during economic downturns.

The FCA also indicated that these changes would “mitigate unintended consequences of the bonus cap” by affording firms the flexibility to modify compensation in response to poor performance or misconduct.

The new regulations will come into effect on October 31 and will be applicable for this fiscal year. According to Anne Sammon, a partner at the law firm Pinsent Masons, employees whose base salaries were increased when the bonus cap was initially introduced “will have a contractual entitlement to those higher salaries and may only consider relinquishing them if offered appropriate incentives.”

The Bonus Cap Would Raise The Fixed Pay

Finance executives cautiously welcomed the announcement made by then-Chancellor Kwasi Kwarteng in September of last year that the UK would abolish the measure. They had initially opposed the bonus cap because it required them to raise fixed pay to retain their workforce, which they feared might lead to a public backlash.

In June of the previous year, when the proposal to eliminate the cap was first discussed, Labour leader Sir Keir Starmer characterized the Conservative party’s plan as “granting pay raises to bankers while imposing pay cuts on district nurses.” Since then, the opposition party has been actively pursuing a campaign to gain the City’s support in anticipation of the upcoming general election, expected next year.

However, Darren Jones, Labour’s shadow chief secretary to the Treasury, criticized the decision to do away with the cap, stating that “at a time when families are grappling with the rising cost of living and increasing mortgages, it reveals everything you need to know about the priorities of this Conservative government, which he perceives as out of touch.”

Read More: Northern Ireland to Receive £7.5 Million UK Government Launchpad Funding for Fostering Innovation and Business Expansion

Bonus Cap Was First Introduced In EU

Paul Nowak, who serves as the general secretary of the Trades Union Congress, the overarching organization for the UK labor movement, strongly criticized the decision, referring to it as “outrageous.”

“At a time when millions of individuals throughout the country are grappling with financial challenges, this move is a direct affront to the working population,” he declared. He also noted that the elimination of the cap reinforces the argument for initiating “a national dialogue on wealth taxation.”

The bonus cap was initially introduced within the EU to put an end to the era of unrestricted bonuses, which had provided financial workers with incentives to take substantial risks. These risks were perceived as a threat to financial stability, particularly in the aftermath of the 2008-09 financial crisis.

The UK has implemented various other regulations concerning compensation, including the requirement that a portion of bonuses be disbursed over several years, and the ability to claw back bonuses in cases of misconduct, subpar individual performance, and sometimes, underperforming company results.

On Tuesday, UK regulators emphasized that companies must maintain a proper balance between base pay and bonuses and ensure that bonuses do not become so substantial that they impede a firm’s capacity to bolster its capital base.

Although the banking industry initially detested the policy upon its introduction, it appears that some bankers have grown to favor the existing approach, according to his remarks.

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.