UK to scrap 2014 cap on banker bonuses

UK banks will be able to raise the bonuses they pay to staff in a move the Financial Conduct Authority and Prudential Regulation Authority says is designed to help large financial institutions lower their fixed costs.

Since 2014 the UK has limited the bonuses which banks, building societies and certain large investment firms can pay staff to no more than twice an employee's base salary.

Critics have argued that this limit gives banks less flexibility as they instead have to increase base salaries in order to remain competitive with rival banks in the US and Asia.

The cap was originally brought in via EU legislation as unlimited bonuses were thought to encourage risky behaviour in the wake of the 2008 financial crisis.

According to the FCA, which announced the change jointly with the PRA, there were unintended consequences of the cap which limited regulated firm’s “ability to adjust variable remuneration to absorb losses or for material poor performance or misconduct that subsequently comes to light.”

“The removal of the bonus cap gives firms the freedom to restructure their pay over time, within the framework of the regulators’ rules on variable remuneration which aim to better align remuneration with prudent risk taking.”

The removal was first raised in the disastrous mini-budget from former Prime Minister Liz Truss, and is one of the few remaining policies left intact.

The FCA said the cap’s removal comes into effect on 31 October and will apply to current and future performance years.