The United Kingdom is set to remove the restrictions on bankers’ variable compensation starting on October 31st as part of the post-Brexit measures aimed at maintaining London’s allure as an international financial and business center and preferred destination for top executives.
According to The Guardian, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) of the Bank of England have confirmed the end of the bonus cap for workers in the banking sector, which has limited the variable portion of remuneration to a maximum of twice the fixed salary since 2014.
“We have made rule changes together with the Prudential Regulation Authority (PRA) to remove the existing limits on the ratio between fixed and variable components of total remuneration,” announced he UK’s financial conduct regulator.
The Financial Times announces that the decision, effective from October 31st, will apply to banks, investment firms designated by the PRA, and mortgage lending companies, covering both current and future returns.
In this contect, the FCA has expressed its intention to “strengthen” the effectiveness of the compensation framework by increasing the proportion of compensation that can be subject to incentive alignment tools within the remuneration structure.
Additionally, the regulators believe that these changes should also help eliminate the unintended consequences of the bonus cap. Particularly, the growth of the fixed component of total remuneration, which reduces a company’s ability to adjust variable compensation to absorb losses or for poor performance or misconduct that later comes to light.
While the bonus cap does not limit total remuneration, it does restrict the variable compensation that a company can pay in relation to an individual’s fixed salary, limiting the proportion of compensation that can be adjusted through risk and performance measures.
Thus, the removal of the bonus cap provides companies with the freedom to restructure their compensation over time, within the framework of regulator rules on variable compensation designed to better align compensation with prudent risk-taking.
The bonus cap for bankers was introduced in 2014 when the United Kingdom was still part of the European Union. Despite the UK government challenging the measure in the European Court of Justice, arguing that the new rules violated the treaty and did not contribute to financial stability.
Under these rules, bankers’ bonuses could not exceed the amount of their fixed remuneration unless authorized by the bank’s shareholders, in which case bonuses could reach a maximum of twice the salary. The objective of these caps was to prevent bankers from taking excessive short-term risks, which, according to Brussels, were at the root of the financial crisis.
Last May, the FCA announced a reform aimed at making the listing regime, the rules that companies must follow to list in the country, more competitive and effective to enhance the City’s appeal. This move came after several companies, including British ones, opted to trade their shares on other exchanges outside London.
In this context, the UK’s financial markets regulator acknowledged that while the UK had been Europe’s largest financial center for many years, stock listings in the British market had decreased by 40% since 2008.
Furthermore, the CEO of the London Stock Exchange Group (LSEG), the operator of LSEG, Julia Hoggett, advocated the need for better salaries for executives to attract and retain talent, both domestic and foreign, in competition with other jurisdictions, especially the United States.
Image of The Guardian