Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK will on Tuesday confirm that it is scrapping the cap on bankers’ bonuses that was inherited from the EU as part of its post-Brexit push to boost the City of London, according to people familiar with the situation.
The move follows a consultation earlier this year on plans to abolish a 2014 rule limiting bonuses to twice base pay for employees of banks, building societies and investment firms.
The UK’s top financial regulators argued against the ban when it was introduced, and the government has claimed that lifting it will increase the post-Brexit competitiveness of the City.
Finance bosses privately gave a hesitant welcome to then chancellor Kwasi Kwarteng’s announcement last September that the UK would abolish the measure, fearing a public backlash. They originally opposed the bonus cap because it forced them to lift fixed pay to retain staff.
When the idea of scrapping the cap was mooted in June last year, Labour leader Sir Keir Starmer said the Conservatives’ plan amounted to “pay rises for bankers, pay cuts for district nurses”. But the opposition party has since embarked on a charm offensive to win the City over ahead of the general election expected next year.
The Treasury declined to comment on the imminent announcement, as did the Financial Conduct Authority and the Prudential Regulation Authority, the regulators that carried out the review jointly.
PRA chief executive Sam Woods said in September 2021 that the regulator had “never been a big fan of the bonus cap” since it reduced companies’ flexibility to cut costs during a downturn.
“Over recent years, the regulators consider that growing evidence has emerged of undesired consequences of the rules on firms’ safety and soundness and UK competitiveness,” the PRA said in its consultation.
The PRA proposed implementing the changes the day after the new rules were published, implying they would apply from October 25. The first pay period to be affected will be 2024.
The bonus cap was introduced in the EU to end the era of unlimited bonuses incentivising finance workers to take huge risks, which was seen as a threat to financial stability in the wake of the 2008-09 global financial crash.
The UK has introduced other rules around pay to curb the threat to stability. These include requiring a percentage of bonuses to be paid out over a number of years, and allowing bonuses to be clawed back in cases of misconduct, poor individual performance and sometimes poor company performance.
After the proposed removal of the bonus cap, UK regulators said they wanted firms to ensure fixed pay and bonuses were “appropriately balanced” and that no individual was “dependent exclusively on variable remuneration, or to an extent likely to encourage them to take risks outside the risk appetite of the firm”.