The UK banking industry’s cap on bonuses is set to be lifted as part of the country’s overhaul of its financial rules following Brexit. The announcement confirms last year’s proposal by former Chancellor, Kwasi Kwarteng, to make London more attractive for business. The regulator plans to remove the cap on bonuses on October 31, in line with the post-Brexit policy changes.
Introduced in 2014, the cap was put in place to curb risk-taking in the financial services industry after the 2008 financial crisis. The cap limited the variable pay of employees at banks, building societies, and investment firms to twice their base pay. Finance bosses have long argued that this cap leads to higher base pay, increasing the banks’ fixed costs and making it difficult to adjust costs in line with performance.
Critics have raised concerns that removing the cap could further increase the risk of the financial system. Moreover, it could predominantly benefit wealthy individuals at a time when households are struggling with the cost of living. Paul Nowak, general secretary of the TUC, referred to the removal of the cap on bonuses as “obscene,” further stating that supporting financial industries is unnecessary when many are struggling to make ends meet.
The bonus cap’s removal is still subject to a consultation by the Financial Conduct Authority and the Prudential Regulation Authority. The two regulators issued a joint statement proposing that the bonus cap has “unintended consequences,” leading firms to increase employees’ fixed pay, resulting in less variation of employee pay during poor performance or misconduct. While the bonus cap has been a highly debated topic, the regulators stand by their decision in support of the banking industry
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