UK Abandons Decade-Old Banker Bonus Restrictions Post-Brexit

October 25, 2023

In a significant post-Brexit regulatory shift, the United Kingdom has abandoned a decade-old restriction on banker bonuses that it had adopted from the European Union. This move marks a distinct separation between the UK and the 27-country bloc it exited in 2020.

Opposition to EU Bonus Cap

The UK had opposed the EU’s decision to implement the bonus cap in 2014, a measure aimed at curbing the kind of conduct that had contributed to the worldwide financial crisis in 2008, leading to government bailouts of financial institutions.

Impact on London’s Financial Hub

The majority of impacted bankers are based in London, and the Bank of England has consistently argued that the bonus cap, which restricted bonuses to double the base pay with shareholder approval, had led to an increase in fixed salaries as a means to bypass it.

Official Elimination of Bonus Cap

Earlier this year, the Bank of England and the Financial Conduct Authority suggested the removal of this cap in a public consultation. The elimination of the bonus cap was officially confirmed in the final policy released on Tuesday.

Criticism from Labor Unions

The decision to eliminate the bonus cap faced strong criticism from the TUC, a confederation representing labor unions. The confederation deemed it “outrageous” and expressed concerns about the timing, given the financial difficulties faced by many in the country.

London’s Competitiveness as a Financial Hub

Both regulatory bodies aim to enhance London’s competitiveness as a global financial hub, particularly in competition with New York, which imposes no bonus restrictions.

Early Implementation of Changes

The regulatory bodies announced that the changes would take effect from October 31, enabling bankers to make modifications ahead of the initially suggested schedule.

Timing Challenges

For some banks, the adjustment may come too late to revamp their systems for bonus distributions scheduled for early 2024.

Considerations for Inflationary Pressures

Bankers with substantial fixed salaries that cannot be contractually diminished may not see an increase in bonuses, as banks aim to avoid exacerbating inflationary pressures during a cost-of-living crisis.

Retention of Discretion

The regulatory authorities emphasize that companies have complete discretion regarding when and whether they modify their compensation frameworks. Other restrictions on bonuses, including the stipulation that 40% must be deferred for a minimum of four years, with half of the bonus remuneration issued in shares, remain in place to address cases of misconduct.

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