The financial regulators have scrapped rules which capped bankers' bonuses at twice their annual salary.
The cap was introduced across the EU in 2014 following the global financial crisis and the government first announced the removal of the cap during last year's mini-Budget.
Speaking during the Budget, then-chancellor Kwasi Kwarteng said: "All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe. It never capped total remuneration, so let’s not sit here and pretend otherwise."
The FCA and PRA have now confirmed that the changes will go ahead from 31st October 2023 and will apply to current and future performance years.
The FCA said that capping bonuses relative to an individual’s fixed pay "[limits] the proportion of remuneration that can be adjusted by risk and performance measures".
The PRA agreed that the cap "can place upward pressure on salaries and allowances that may not be linked to longer-term performance and cannot be reduced or clawed back in the event of later failure and/or previous misconduct coming to light".
It added that a larger element of pay that is fixed, rather than variable, can also "reduce firms’ flexibility to adjust to changes in conditions".
In 2022 when the change was first announced, Fran Boait, executive director at Positive Money, said: “Gifting bankers uncapped bonuses at a time when millions of households are choosing between eating and heating is beyond tone deaf - it’s shameful."
Bradley Richardson, partner in Linklaters’ employment and incentives practice, commented: "Today’s announcement confirms that the 'bonus cap' will be removed as had been expected. But the surprise is that the cap will be removed with immediate effect on 31 October – and so the change will be effective for the upcoming bonus round. The regulators explain this faster timetable as giving firms an ability to restructure pay more quickly if they choose to do so, and therefore more flexibility to manage their cost base to deal with downturns.
"The bonus cap led to more pay being delivered as fixed pay rather than through performance-based bonuses, and removing the cap is intended to give firms flexibility to reverse that if they choose to. The FCA says that having a greater proportion of pay being able to be delivered as bonuses, aligned to individual and the firm’s performance, will foster better market conduct and risk management as well as discouraging behaviour that delivers poor outcomes.
"The key premise in removing the cap is to give banks’ flexibility to manage their cost base through the balance of fixed and variable pay. Banks will therefore still have to set a maximum ratio between fixed pay and bonuses – but will now have flexibility where to set that ratio rather than being subject to the capped ratio of 200% that has applied since 2014.
"The bonus cap was always the headline grabbing part of the remuneration rules appliable to banks in the UK – but it’s key that it was only ever one part of the puzzle. The UK’s rules on remuneration in the banking sector remain some of the most stringent in the world – in particular for senior staff UK banks are required to defer bonuses, and have bonuses subject to repayment through clawback provisions, over longer periods than anywhere else in the world.
"The regulators highlight that removing the bonus cap brings the UK into line with the rest of the world other than the EU. The bonus cap which applies under the remuneration rules applied in the EU will, however, continue to apply – including for staff working in London but who are regulated under the EU rules."
