In a significant move, American banking giant Citi is poised to eliminate the bonus cap for its London-based investment bankers. This decision comes on the heels of the Conservative government’s post-Brexit move last year, which saw the abandonment of EU-imposed pay restrictions that were implemented in the wake of the financial crisis.
Citi’s decision aligns with recent actions taken by other major players in the industry, such as Barclays, which informed its staff of the bonus cap removal just days ago. The cap, introduced by Brussels in 2014, limited bonuses to a maximum of one times an employee’s salary, or twice the amount with shareholder approval. The primary aim of the cap was to curb excessive risk-taking within the banking sector.
Interestingly, the bonus cap had an unintended consequence of driving up the fixed salaries of some bankers, as employers sought to compensate for the restricted bonus payouts. This development raised concerns among UK financial regulators, who argued that it hindered banks’ ability to manage costs during economic downturns and to recover pay when mistakes were made.
The push to scrap the bonus cap gained momentum under the brief tenure of Kwasi Kwarteng as chancellor during Liz Truss’s short-lived government. In May, Goldman Sachs became the first bank to implement plans to remove the cap, while also reducing fixed pay to accommodate higher bonus multiples. JP Morgan and Barclays followed suit, allowing bonuses of up to ten times base salaries.
The removal of the bonus cap is expected to make the City of London a more attractive location for financial firms, as argued by Richard Gnodde, head of Goldman’s international operations. Gnodde had previously criticised the cap for increasing costs when moving staff between New York and London. As the UK’s banking sector adapts to the post-Brexit landscape, the scrapping of the bonus cap marks a significant shift in compensation practices.
It remains to be seen how this change will impact the industry’s dynamics and whether it will successfully attract and retain top talent in the competitive world of finance.
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