As part of its post Brexit push to boost London’s City, the UK announced it would scrap the EU-inherited cap on bankers bonuses.
This move comes after a consultation in this year about whether to repeal a rule from 2014 that limited bonuses for employees of investment firms, banks and building societies to double their base salary.
Since leaving the EU, the UK government claims that the removal of this ban will make London more competitive in the future post-Brexit by encouraging banks to base staff there.
In a document published on Tuesday by the Prudential Regulation Authority of the Bank of England, which conducted the consultations with the Financial Conduct Authority (FCA), it was stated that “a bonus limit is not regularly imposed in leading international financial centers outside of the EU”.
The PRA stated that the cap was “identified as a factor limiting labour movement” and added the change would increase financial stability by allowing businesses to reduce their pay more quickly during recessions.
The FCA stated that the changes will “help eliminate unintended consequences” of the bonus cap by giving companies flexibility to reduce pay in response to poor performance or misconduct.
The new rules will be in effect as of October 31, and they apply to this year’s financial statements. Anne Sammon of Pinsent Masons said that staff who had their base salaries increased when the bonus cap was implemented “will contractually be entitled to these higher salaries, and will only give them up if they are given some incentive to so”.
The UK’s finance chiefs were hesitant to welcome the announcement made by Kwasi Kwarteng, then the UK’s former chancellor in September last year that the UK was scrapping the measure. They feared a backlash from the public. They initially opposed the bonus cap as it forced them lift fixed pay in order to retain staff.
Labour leader Sir Keir starmer, when the idea to scrap the cap was first mooted last June, said that the Conservatives plan would amount to “pay increases for bankers and pay cuts for district nurse”. Since , the opposition party has launched a charm campaign in order to win over the City ahead of a general election next year.
Darren Jones, Labour’s shadow chief secretary to the Treasury, however, stated that the decision to eliminate the cap was made “at a period when families are struggling to pay for the rising cost of living, and their mortgages are increasing”. . . “This book tells you all you need to about the priorities and incompetence of this Conservative government”.
Paul Nowak, General Secretary of the Trades Union Congress (the umbrella body for UK Labour Movement) criticized the decision as being “obscene”.
He said that removing the cap was an insult to workers, who are already struggling to get by.
The EU introduced the bonus cap to stop the practice of giving finance workers unlimited bonuses, which encouraged them to take large risks. This was seen as a danger to the financial stability after the financial crisis in 2008-09.
In the UK, there are other rules regarding pay. These include a requirement that bonuses be paid over a period of time, as well as the ability to claw back bonuses in cases of misconduct or poor performance by an individual, or even a company.
The UK regulators said on Tuesday that firms should still make sure that base pay is “appropriately” balanced with bonuses and that bonuses are not so large that they hinder a firm from strengthening its capital base.