The UK government and regulators are planning to remove the bonus cap for bankers that was imposed by the European Union after the global financial crisis. The cap limits the bonuses of bankers earning more than 500,000 pounds to 100% of their fixed pay, or 200% with shareholder approval. The move is part of Britain’s post-Brexit strategy to ease some of the EU rules and make the UK financial sector more competitive and attractive for top talent.
The Bank of England and the Financial Conduct Authority have launched a consultation on the proposal, which is expected to be finalized in the coming weeks. The new rules would apply to bonuses earned over 2024, but there is also an option to bring forward the start date to cover bonuses for 2023.
The bonus cap was introduced by the EU in 2014 to curb excessive risk-taking and align the interests of bankers with those of their shareholders and customers. However, critics argue that the cap has led to an increase in fixed pay, which makes it harder for banks to cut costs and absorb losses in a downturn. They also claim that the cap has made it difficult for UK banks to compete with rivals in New York, Singapore, and other financial hubs that do not have such restrictions.
Bankers may prefer fixed pay over variable bonuses
However, not everyone is convinced that scrapping the bonus cap will have a significant impact on the UK banking industry. Some bankers, lawyers, and remuneration consultants say that many high-flyers may prefer to keep their guaranteed pay rather than opting for potentially higher but more uncertain bonuses.
“Removing the cap isn’t going to attract more top bankers to the UK because their pay will be more uncertain,” Luke Hildyard, director at the High Pay Centre think tank, told Reuters1.
According to the latest data from the European Banking Authority, more than 70% of EU-based bankers earning over 1 million euros and subject to the bonus cap were based in Britain before it left the bloc in 2020. To make their compensation more competitive globally, some UK banks have supplemented base salaries with bespoke and often undisclosed role-based allowances (RBAs), which are not subject to the bonus cap.
“I very much doubt there’ll be a dramatic shift back to the pre-financial crisis days of low base salaries and high bonuses,” Suzanne Horne, head of the International Employment practice at Paul Hastings, told Reuters1.
Public backlash and EU response are uncertain
Another factor that may deter UK banks from increasing bonuses is the potential public backlash and political pressure. The UK economy is facing a cost of living crisis, high inflation, and industrial action by the public sector unseen since the 1970s. Any announcement of sudden changes to a bank’s bonus structure may prove controversial and invite criticism from politicians, media, and civil society.
“Any bank that decides to increase its bonus pool significantly will need to be very careful about how it communicates that decision internally and externally,” Jon Terry, global financial services pay leader at PwC, told Reuters1.
Moreover, it is unclear how the EU will react to Britain’s move to scrap the bonus cap. The EU may impose stricter rules or sanctions on UK-based banks that operate in its market, or demand reciprocal access to its own banks in Britain. The EU has already withheld granting full equivalence status to UK financial firms after Brexit, limiting their ability to offer services across the bloc.
“The EU could decide to impose additional requirements on UK banks operating in Europe as a result of this change,” Horne said1. “There is still a lot of uncertainty about how this will play out.”
