‘Led to higher fixed salaries’: Post-Brexit Britain scraps cap on banker bonuses inherited from EU

The United Kingdom eliminated a decade-old restriction on banker bonuses that had been inherited from the European Union on Tuesday. This move signifies a clear departure in post-Brexit financial regulations from the 27-country bloc it exited in 2020.

The European Union introduced the bonus cap in 2014, a measure against the kinds of practices that contributed to the global financial crisis of 2008 and the subsequent need for taxpayer-funded bailouts of financial institutions. Notably, the United Kingdom was outvoted in the EU when this cap was introduced.

The majority of affected bankers are based in London. The Bank of England (BoE) had long contended that the cap, which limits bonuses to twice the basic salary with shareholder approval, led to higher fixed salaries as a way to circumvent it. Earlier this year, the BoE and the Financial Conduct Authority proposed eliminating the cap through a public consultation, and this abolition was confirmed in the final policy published on Tuesday.

Both regulators have a mandate to promote the competitiveness of London as a global financial hub, particularly in its competition with New York, where there are no bonus restrictions. Allowing bankers to implement this change earlier than the initially proposed date will further this goal.

In a joint statement, the regulators declared that these changes would take effect from October 31, which is earlier than the original proposed start date in 2024. "We support the removal of the bonus cap, which will ensure the financial services industry is globally competitive and make the UK a more attractive place to work for international professionals," banking industry body UK Finance said.

However, it is worth noting that this change may come too late for some banks to adjust their systems in time for this year's bonus allocations, which are scheduled for early 2024. Moreover, bonuses may not necessarily increase for bankers with high basic salaries that are contractually fixed, as banks strive to avoid accusations of contributing to inflationary pressures amid the current cost-of-living crisis.

The regulators emphasised that companies have full flexibility to decide when or if they wish to alter their pay structures. 

Certain limitations on bonuses still remain in place, including the requirement that 40% of bonuses be deferred over at least four years, with half of the bonus being paid in shares. This structure makes it easier for regulators to recover awards in case of any misconduct.

The Trades Union Congress (TUC) criticised the decision to abolish the bonus cap as "obscene," particularly at a time when many people in the country are grappling with financial challenges. On the other hand, the law firm Linklaters pointed out that this move aligns the UK with the rest of the world, except for the EU, although it will continue to apply to staff working at EU banks in London who are subject to the bloc's rules.

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