The decision to remove the cap on bankers’ bonuses from the end of this month (31 October) has received a mixed reaction.
First announced last year by Kwasi Kwarteng, the former chancellor, the policy was one of a few from his mini-Budget to be retained by his successor which was designed to limit excessive risk-taking in the financial services sector.
The cap would have restricted the amount of variable pay that banks, building societies and investment companies could pay their staff, with a maximum of twice their basic wages.
However, following a four-month consultation by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), the decision was made to scrap the policy.
Commenting on the news, Suzanne Horne, partner in the employment law department at global law firm Paul Hastings, insisted there is little cause for concern.
She said: “Despite removal of the bonus cap, I very much doubt that there’ll be a dramatic shift back to the pre-financial crisis days of low base salaries and high bonuses. We have a cost-of-living crisis, high inflation, industrial action by the public sector not seen since the 70s, and the increasing likelihood of a Labour government. In addition, banks now have more active and vocal stakeholders in their regulator, shareholders, the unions and workforce, driven at least in part by ESG. Therefore, any announcement of sudden changes to a bank’s bonus structure will likely prove controversial.
“What is more likely is that the shift away from capped bonuses will evolve gradually to give the Banks greater flexibility to attract and retain talent in a more measured way that doesn’t have a reputational impact, particularly as the UK Government hopes this change will spark market growth and realise the benefits of Brexit.”
Horne explained that UK banks do not have carte blanche to reduce fixed pay or remove role-based allowances, brought in to keep bankers whole following the cap as they would need to either get employee consent to change contractual terms or wait for promotions or role changes to phase out these packages over time.
She added: “That said, it is possible that this consent may be more forthcoming against a backdrop of significant redundancies at the banks in the first part of 2023, coupled with bank collapses and mergers.”
However, the Trades Union Congress (TUC) has slammed the move to scrap the cap.
TUC general secretary Paul Nowak said: “This is an obscene decision. City financiers are already enjoying bumper bonuses. They don’t need another helping hand from the Conservatives.
“At a time when millions up and down the country are struggling to make ends meet – this is an insult to working people.”