Cap, scrapped: Banker bonus limit to go in bid to boost City competitiveness

Regulators have confirmed plans to scrap the cap on bankers’ bonuses with the new policy going live at the end of this month.

In a joint statement, the UK’s financial watchdogs confirmed that they will “remove the current limits on the ratio between fixed and variable pay”.

The timing of the change means banks will be able to offer bigger rewards in the upcoming round of bonuses, which regulators hope will give banks more flexibility about their cost base going into a potential downturn.

The plan to scrap the cap was announced last year by then Chancellor Kwasi Kwarteng to the surprise of many in the City.

Backers of the move say that it will make the City a more attractive place to do business by allowing firms to attract the best talent, although the policy was not high up the industry’s agenda.

One senior banker told City AM that the government has made more of the changes than the industry has.

“We certainly haven’t got any plans to change anything,” they said. 

Explaining the policy, the Prudential Regulation Authority (PRA) said the change supports its new objective to further competitiveness by “facilitating effective competition”.

But the PRA also said the policy would enhance the safety and soundness of the financial sector by giving firms “further flexibility over their cost base to deal with downturns”.

“The bonus cap does not limit total remuneration but limits the variable remuneration a firm can pay relative to an individual’s fixed pay. This has the effect of limiting the proportion of remuneration that can be adjusted by risk and performance measures,” the regulators said.

Regulations on the bonus cap were imposed by the EU in 2014 after the financial crisis. It caps bonuses at 100 per cent of annual pay, or 200 per cent with shareholder approval.

Banks have complained that the cap actually increases their costs by forcing them to offer higher levels of fixed pay.

Earlier in the year, Sam Woods, chief executive of the Prudential Regulation Authority (PRA) told MPs that the “only effect” of the cap has been to increase fixed pay. Regulators hope that dropping the cap would better align pay with performance.

The policy is likely to have a much bigger impact on investment banks, where there is greater volatility in earnings. 

By allowing more variable pay, banks will have lower costs going into downturns. When dealmaking volumes are low, big investment banks simply lay off large numbers of staff. 

Harvey Knight, UK head of the financial services regulatory group at Withers, said: “It was high time this cap was removed as it was an ill conceived measure in the first place as it raised all UK based banks’ fixed remuneration costs as the UK’s regulators sought to argue whilst within the EU.

“Once it is removed, the City of London’s competitiveness and attractiveness to internationally mobile talent and their international firms should be enhanced and re-enforced,” Knight continued.

UK Finance, the banking industry body, were supportive of the change saying it will make the UK a “more attractive place to work for international professionals”.

The move comes after concerns aired by London Stock Exchange boss Julia Hoggett that the capital was underpaying its top talent.

“Attracting and retaining domestic and international talent to create that value is something that UK listed company boards and their executive leadership teams strive to do every day,” she said in May.

“And yet, very often, this talent objective is hampered by the advice and analysis of the proxy agencies and some asset managers voting against executive pay policies even when those pay levels are significantly below global benchmarks.”