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The UK is going ahead with scrapping the cap on bankers’ bonuses, enforcing plans unveiled by Liz Truss’s government last year.
The cap limiting bonuses to a maximum of twice a banker’s base pay will be lifted from October 31, the Prudential Regulation Authority said on Tuesday.
Banks can pay staff as they like for the current financial year, the PRA said, though they need to ensure fixed and variable pay are “appropriately balanced.”
The European Union introduced the bonus cap for “material risk takers” in 2014 in response to public fury about the financial crisis. The UK unsuccessfully opposed the measure, on the grounds it would prompt firms to hike fixed pay, making it harder to manage costs.
Last year, Kwasi Kwarteng announced during his brief stint as Chancellor of the Exchequer that the cap would be abandoned to make post-Brexit Britain more attractive as a financial center.
The PRA said it was still reviewing other aspects of pay rules such as deferrals, which force some executives to wait as long as seven years for their awards. Two respondents told the PRA that the UK’s longer deferral periods lead firms to increase compensation packages to stay internationally competitive.
Sam Woods, the PRA’s chief executive, said last year that the body would consider whether pay rules could be made more “effective and proportionate,” but added that there needed to be structures to ensure senior employees had the “right incentives.”
While financial firms are broadly in favor of removing the cap, many said last year they would have preferred other measures such as tax cuts. They also raised several challenges, such as how to cut elevated fixed pay to re-balance compensation packages, and whether existing and new employees should be treated differently.
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