Britain to scrap EU bonus cap for bankers
Britain is set to remove the cap on bonuses for bankers that was imposed by the European Union after the global financial crisis. The move is part of the country’s post-Brexit strategy to ease financial regulations and attract more talent and capital to its financial sector.
The Bank of England and the Financial Conduct Authority are expected to announce the outcome of their consultation on the proposal in the coming weeks. The new rules would apply to bonuses earned over 2024, but there is also an option to bring forward the start date to cover bonuses for 2023.
The bonus cap, which limits payouts to 100% of fixed pay or 200% with shareholder approval, was introduced by the EU in 2014 to curb excessive risk-taking and align pay with long-term performance. Britain opposed the cap at the time, arguing that it would make its banks less competitive and push up fixed salaries.
Bankers may prefer fixed pay over variable bonuses
However, scrapping the bonus cap may not have a significant impact on the pay of top bankers in Britain, as many of them may prefer to keep their fixed pay rather than gamble on uncertain bonuses.
According to the latest data from the European Banking Authority, more than 70% of EU-based bankers earning over 1 million euros and subject to the bonus cap were based in Britain before it left the bloc in 2020. To compensate for the cap, some UK banks have introduced role-based allowances (RBAs) that are paid as fixed pay but can be adjusted annually.
Regulators say that RBAs make it harder for banks to cut costs and absorb losses in a downturn, as they are less flexible than bonuses. But bankers may be reluctant to give up their guaranteed pay for potentially higher bonuses, which can vary widely depending on market conditions and performance.
“I very much doubt there’ll be a dramatic shift back to the pre-financial crisis days of low base salaries and high bonuses,” Suzanne Horne, head of the International Employment practice at Paul Hastings, told Reuters. “We have a cost of living crisis, high inflation, industrial action by the public sector unseen since the 70s … any announcement of sudden changes to a bank’s bonus structure will likely prove controversial.”
Britain seeks to boost its financial sector after Brexit
The decision to scrap the bonus cap is part of Britain’s broader effort to boost its financial sector after losing some business and access to the EU market following Brexit. The government and regulators have launched a series of reviews and reforms to make the UK more attractive for financial firms and investors.
Some of these initiatives include easing listing rules for companies, allowing more overseas firms to join UK clearing houses, simplifying capital requirements for smaller banks, and introducing a new visa scheme for fintech workers.
Britain also hopes that by diverging from EU rules, it can enhance its competitiveness and innovation in areas such as green finance, digital currencies, and fintech. However, it faces challenges from other global financial hubs such as New York, Singapore, Hong Kong, and Shanghai, as well as from EU centres such as Paris and Frankfurt.
EU response to Britain’s rule changes remains unclear
The EU has not yet indicated how it will respond to Britain’s rule changes, which could affect its decision on whether to grant UK firms more access to its market. The EU has so far only granted temporary equivalence rights to UK clearing houses, which allow them to process euro-denominated transactions.
The EU has said that it will not grant equivalence rights until it has more clarity on Britain’s regulatory plans and their impact on financial stability and consumer protection. The EU has also expressed concerns about Britain’s intention to diverge from its rules and standards.
The EU could also retaliate by imposing stricter rules on its own banks or by limiting their exposure to UK-based entities. However, some analysts say that such measures could backfire by hurting the EU’s own financial sector and reducing its global influence.
