One of the major changes the EU implemented in the wake of the 2008 financial crisis has been officially removed by the UK’s financial authorities with the removal of the banker bonus cap.
Nearly a year after Liz Truss’s short-lived government originally announced plans to scrap the regulations in an effort to draw in more investment and get rid of EU regulations after Brexit, the Bank of England and the Financial Conduct Authority (FCA) officially stated that the cap would be removed on October 31.
The announcement was criticized by unions as “an insult to working people”. The TUC’s general secretary, Paul Nowak, said, “This is an outrageous decision.” Big bonuses are already being enjoyed by city financiers. The Conservatives don’t need to lend them any more assistance.
The restrictions, which have restricted banker bonuses at twice their yearly salary since 2014, were the subject of a protracted public deliberation before the decision was made. According to the FCA, the regulations would be applicable to both “current and future performance years,” which means that in the upcoming year, bankers may see a ten-year high in bonus pay.
Higher rewards will actually probably be implemented gradually, though, as banks executives have already stated that it is doubtful that the reforms will have a significant impact on compensation very soon.
In a letter to bank pay committees, the FCA announced that it will be emphasizing how compensation packages are “aligning with and supporting a healthy culture, and encouraging positive outcomes for consumers.”
The cap was first imposed as a part of reforms following the banking crisis of 2007–2008, with the intention of eliminating a bonus culture that was attributed to prioritizing short-term gains over longer-term stability.
The idea was to reduce the incentive for risky behavior by not basing as much of an individual’s salary on performance.
Politicians and authorities, on the other hand, were largely against the regulations, claiming that the tightening would make it more difficult to draw in talented bankers, who would instead relocate to competing centers like New York, Singapore, or Zurich. In 2014, George Osborne, the chancellor at the time, even attempted to have the policy overturned in the European Court of Justice.
Additionally, the Bank of England was worried at the time that the cap would increase fixed incomes and put pressure on bank budgets. Although the regulations did increase fixed pay, lenders have rarely been accused for experiencing financial difficulties as a result of the increased expenses.
Former chancellor Kwasi Kwarteng revealed plans to eliminate the cap as part of the failed mini-budget of the Truss government in September 2022, reigniting attempts to reform the regulations.
He stated that by doing this, “here in London, not Paris, not Frankfurt, not New York,” new investment from international banks would be attracted, more well-paying jobs would be created, and tax revenues would eventually rise.
His decision was made as worries increased that the City was losing out to other financial hubs like Paris, which was luring investment banking experts with 30% income tax rates in an effort to win them over after Brexit.
Ministers have also been aiming to compete with US financial centers like New York, which do not have bonus caps on bankers.
Removing the bonus cap would also improve the “safety and soundness” of banks, as they would be able to “restructure pay faster and the change would give firms further flexibility over their cost base to deal with downturns,” according to a statement made on Tuesday by the Prudential Regulation Authority (PRA), the bank’s regulatory arm.