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The UK has said it will scrap a cap on bankers’ bonuses that was inherited from the EU as part of its post-Brexit push to boost the City of London.
The move follows a consultation this year on whether 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 since leaving the EU the government has claimed its removal will increase the post-Brexit competitiveness of the City by making London a more attractive place for banks to base their staff.
In a report on Tuesday, the Bank of England’s Prudential Regulation Authority, which carried out the consultation with the Financial Conduct Authority, said “a bonus cap is not routinely imposed in other leading international financial centres outside the EU”.
The PRA said the cap “has been identified as a factor in limiting labour mobility” and added that the change would boost financial stability by allowing companies to reduce pay faster during downturns.
The FCA said the changes would “help remove unintended consequences of the bonus cap” by giving firms flexibility to cut pay to deal with poor performance or misconduct.
The new rules take effect from October 31 and apply from this financial year. Anne Sammon, partner at law firm Pinsent Masons, said staff whose base pay was hiked 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”.
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”. The opposition party has since embarked on a charm offensive to win the City over ahead of the general election expected next year.
But Darren Jones, Labour’s shadow chief secretary to the Treasury, said the decision to abolish the cap “at a time when families are struggling with the cost of living and mortgages are rising . . . tells you everything you need to know about the priorities of this out of touch Conservative government”.
Paul Nowak, general secretary of the Trades Union Congress, the umbrella body for the UK labour movement, criticised the decision as “obscene”.
“At a time when millions up and down the country are struggling to make ends meet — this is an insult to working people,” he said, adding that the removal of the cap added to the case for “a national conversation about taxing wealth”.
The bonus cap was introduced in the EU to end the era of unlimited bonuses giving an incentive to finance workers to take huge risks, which was seen as a threat to financial stability following the 2008-09 financial crisis.
The UK has other rules on pay, including 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.
UK regulators on Tuesday said that firms must still ensure that base pay and bonuses were “appropriately balanced” and that bonuses were not so big they limit a firm’s ability to strengthen its capital base.
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