On Tuesday, Britain took a significant step in its post-Brexit financial journey by abolishing a decade-old cap on banker bonuses originally imposed by the European Union.
This move underscores the growing divergence in financial regulations between the UK and the EU, which it departed from in 2020.
The EU introduced the bonus cap in 2014 to prevent the risky behavior that contributed to the global financial crisis of 2008 and the subsequent taxpayer-funded bailouts of financial institutions.
However, the UK consistently opposed this measure during its time in the EU.
Critics of the decision to abandon the cap, including trade unions and activists, argued that it is ill-timed, particularly when many households are grappling with the challenges of rising living costs.
The primary impact of this decision will be felt by bankers based in London, as the Bank of England (BoE) has long maintained that the cap led to higher fixed salaries to bypass it.
The BoE, along with the Financial Conduct Authority, had proposed scrapping the cap earlier in the year, and this proposal was confirmed in the final policy released on Tuesday.
Both regulatory bodies have a mandate to enhance London’s competitiveness as a global financial hub in its rivalry with New York, where bonus caps do not exist.
Advancing the implementation of this change, effective from October 31 rather than the initially planned 2024 start date, is expected to support this goal.
“We support the removal of the bonus cap, which will ensure the financial services industry is globally competitive and make the UK a more attractive place to work for international professionals,” stated banking industry body UK Finance.
However, it may be too late for some banks to adjust their systems in time for this year’s bonus distributions in early 2024.
Furthermore, bonuses may not increase significantly for bankers with high basic salaries, as banks seek to avoid contributing to inflationary pressures.
The removal of the cap is seen as a disruptive change that could attract talent from the United States and Asia.
Nevertheless, it is expected to evolve gradually, and other restrictions on bonuses, such as deferring 40% of them over at least four years with half paid in shares, will remain in place.
While some consider the decision to scrap the bonus cap a positive step, groups like the TUC confederation of labor unions and Positive Money view it as detrimental to the well-being of the public.
The bonus cap will still apply to staff at EU banks in London regulated under EU rules, maintaining a divide between the UK and the EU in financial regulation.