bankers from the air

Critics argue that a cap on bankers’ bonuses is ineffective and outdated, but the issue remains controversial.

UK chancellor Rishi Sunak has been under pressure from investment banks to scrap the cap on bankers’ bonuses amid claims it could put London at a competitive disadvantage.

The cap, which sets a limit on bonuses at two times salary, was introduced across the EU in 2013 in the aftermath of the global financial crisis, as public anger grew against perceived greed and malpractice in the banking industry.

Since the UK’s exit from the EU single market this year, bankers have pushed for the cap to be removed as part of reforms intended to boost London’s post-Brexit profile. But such a move could prove controversial and leave the government open to accusations that it prioritises the interests of a wealthy elite.

“It’s a very contentious subject,” says Robert Parker, chairman of the International Capital Market Association’s asset management and investors council, speaking in a personal capacity. “Bonus caps were introduced following some very unattractive behaviour prior to the financial crisis.”

The cap was intended to drive down banking pay. In reality it has driven up fixed pay through salary and role-based allowances

Duncan Nicholls, PwC

The sale of collateralised debt obligations (CDOs) during that period famously generated huge bonuses for the bankers involved, only for a large proportion of the CDOs to end up as asset write-downs just a few years later. “Many people felt bonuses had got out of control and that something needed to be done to discourage such behaviour in the future,” Mr Parker continues.

Over the years, however, critics argue the bonus cap has had unintended consequences. “The cap was intended to drive down banking pay. In reality it has driven up fixed pay through salary and role-based allowances, as firms seek to maintain total compensation as much as possible [within the limits of the rule],” says Duncan Nicholls, a partner at PwC, who advises financial services groups on remuneration practices.

Moreover, the blanket application of the cap across global financial organisations regardless of an employee’s role has proven unwieldy, Mr Parker says.

Mr Nicholls argues that removing the cap would provide firms with more flexibility. “It would allow banks to manage fixed costs more effectively, while providing a greater proportion of variable pay, which is at risk, linked to performance and subject to other regulatory risk alignment tools like malus and clawback,” he says.

A question of competitiveness

One of the principal criticisms of the cap is the impact it could have on London’s future role as a global financial centre. “The City of London has to find ways to remain competitive following Brexit,” says Tim Skeet, a career banker based in London. “But the issue needs to be approached with acute sensitivity.

“The City is not a separate community; it is an integral part of British society and it is in the interests of the nation that this continues. We need to look at ways to make London attractive to the right kind of talent because by living in the UK and paying taxes they contribute to the economy as a whole.”

Mr Skeet adds that the banking industry is subject to more intensive regulatory scrutiny than it was before the financial crisis. “The Senior Managers Regime and a host of other measures are now in place to ensure far greater accountability,” he says.

Most remuneration regulation worldwide is based on work by the Financial Stability Board, which does not advocate a bonus cap, Mr Nicholls says, adding that EU countries such as Germany and the Netherlands have widened the application of the cap.

According to Mr Parker, the evidence that bankers have shunned London for jurisdictions that do not apply a bonus cap, such as New York or Singapore, is minimal. “It's difficult to provide evidence that the cap has resulted in a competitive disadvantage for London,” he says. “But the cap clearly has a lot of overall disadvantages.”

The debate about whether to scrap the bonus cap comes during a period of strained relations between the UK and the EU. Brussels has stalled on deciding whether UK financial rules are ‘equivalent’ to regulation in the bloc, amid concerns that the UK will water down its financial services rules in the future.

“The EU does not trust the UK right now when it comes to the supervisory and regulatory framework for banking and finance,” says William Wright,  managing director of think tank New Financial. “Many people remain convinced the UK wants to undercut the EU and compete on unfair terms.

“This lack of trust has held up the equivalence process, and if the UK were to get rid of the bonus cap, it would further undermine the relationship and damage efforts to move onto a healthier, more constructive relationship, which is ultimately what everyone wants.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter