Cap on bankers' bonuses to be abolished next week (2024)

The cap on bankers' bonuses is to be abolished, financial regulators have announced.

From Tuesday 31 October, EU rules that limit bonus payments to twice a banker's salary will be removed in the UK, the Bank of England's Prudential Regulatory Authority (PRA) said.

The policy change was initially announced by former chancellor Kwasi Kwarteng in the infamous September 2022 mini-budget of the Liz Truss premiership.

It was one of the few announcements to be retained when Chancellor Jeremy Hunt took charge of the Treasury.

City executives had complained that the cap was a barrier to recruiting and retaining quality workers, and London was losing out on talented staff as a result.

The head of the London Stock Exchange had in May called for company bosses to be paid more.

"The alternative is we continue standing idly by as our biggest exports become skills, talent, tax revenue and the companies that generate it," Julia Hoggett said.

From next week, there will be no legislative barriers on bonus payments for employees of banks, building societies and major investment firms that are regulated by the PRA.

The move is being made to deal with what the PRA and Financial Conduct Authority (FCA) said are "unintended consequences" of the cap, namely that salaries have been increased as a workaround.

Having high fixed yearly payments, rather than variable bonus sums, makes it harder for firms to adjust to times when financial performance is poor or to react to potential misconduct by a senior executive, a statement by the bodies said.

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The announcement follows a period of consultation conducted by the PRA and will apply to the current and future financial years.

The cap was imposed in 2014 in the wake of the 2008 global financial crash. It was associated with incentivising bankers to take outsized risks, which the EU sought to discourage.

'Out of touch'

Not everyone welcomed the removal of the cap, with the decision branded "obscene" by the Trades Union Congress (TUC).

Its secretary general Paul Nowak said: "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."

The Labour Party also criticised the decision as being "out of touch," while thinktank the High Pay Centre said it would only benefit a handful of the UK's "super rich".

Executive director Luke Hildyard said: "The UK already has more millionaire bankers than the whole of the EU put together yet our economy is stagnant and our public services are in crisis.

"Whether or not the bonus cap was an effective policy measure, we can't rely on the outsized incomes of a handful of super-rich bankers trickling down to lift slumping living standards for the wider population."

A spokesperson for the Treasury said: "Decisions on remuneration in the banking sector are for the PRA as the independent statutory regulator."

The prime minister's official spokesman also distanced Number 10 from the move.

He told reporters: "The government's position is that regulatory independence is important and we don't intend to cut across that independence.

"Obviously, the [PRA] themselves have consulted on this. They took that independent decision, followed a four-month consultation, which received responses from experts in the field and the vast majority, as I understand it, supported that decision."