The UK’s financial regulators have formally scrapped the banker bonus cap, removing one of the key reforms introduced by the EU in the wake of the 2008 financial crisis.
The Bank of England and Financial Conduct Authority (FCA) confirmed that the cap would disappear on 31 October, nearly a year after Liz Truss’s short-lived government first revealed plans to ditch the rules in a bid to attract more investment and shed EU rules post-Brexit.
Unions condemned the announcement as “an insult to working people”. Paul Nowak, the general secretary of the TUC, added: “This is an obscene decision. City financiers are already enjoying bumper bonuses. They don’t need another helping hand from the Conservatives.”
The decision follows a lengthy consultation over the regulations, which since 2014 have capped banker bonuses at two times their annual salaries. The FCA said the rules would apply to “current and future performance years”, meaning bankers could theoretically see bonus pay rise to its highest level in a decade in the new year.
In reality, however, higher payouts are likely to be phased in over time, with banking bosses having previously said the reforms were unlikely to result in substantial changes to pay in the near term.
The FCA said it was planning to write to banks’ pay committees shortly, to stress that pay packages are “aligning with and supporting a healthy culture, and encouraging positive outcomes for consumers”.
The cap was originally part of changes introduced after the 2007-08 banking crash, and aimed to stamp out a bonus culture blamed for encouraging short-term profits over longer-term stability.
The hope was that, with less of an individual’s pay riding on performance, there would be a lower incentive for risky behaviour.
However, politicians and regulators broadly opposed the rules, arguing that the clampdown would make it harder to attract skilled bankers, who would instead flee to rival hubs in New York, Singapore or Zurich. The then chancellor, George Osborne, even tried to overturn the measure at the European court of justice in 2014.
The Bank of England was also concerned at the time that the cap would lead to a rise in fixed salaries and squeeze bank finances. While the rules did, in fact, raise fixed pay, the extra costs have rarely been blamed for causing any financial distress for lenders.
Attempts to overhaul the rules were revived by former chancellor Kwasi Kwarteng, who announced plans to scrap the cap as part of the Truss government’s disastrous mini-budget in September 2022.
He claimed doing so would spark fresh investment from global banks, create a greater number of higher-paying jobs and ultimately boost tax takings, “here in London, not Paris, not Frankfurt, not New York”.
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His move came as concerns grew that the City was losing out to other financial centres, including Paris, which was offering 30% income tax rates to attract investment banking professionals post-Brexit.
Ministers have also been hoping to compete with US hubs such as New York, where bankers have not been subject to a bonus cap.
The Bank’s regulatory arm, the Prudential Regulation Authority (PRA) said on Tuesday that scrapping the bonus cap would also boost the “safety and soundness” of banks, which would be able to “restructure pay faster and the change would give firms further flexibility over their cost base to deal with downturns”.
The PRA said putting a greater chunk of pay on the line could also help incentivise staff to meet targets linked to “effective risk management, good conduct, and the long-term interests of the firms”.
The Treasury did not comment directly on the changes, saying only that pay regulations were a matter for the PRA.