The Era of Limitless Bonuses Returns for London's Bankers – UK Caps Lifted

The UK has scrapped a cap on bankers bonuses as part of efforts to enhance the competitiveness of London's financial industry after Brexit. Introduced in the aftermath of the global financial crisis, the rule that limited banker bonuses to twice their annual base pay was initially implemented when the UK was a member of the European Union. The Prudential Regulation Authority announced on Tuesday that the cap will be abolished starting from October 31.

The regulator noted that other leading international financial centers outside the EU do not routinely impose a bonus cap, and acknowledged that the cap has been identified as a factor that limits labor mobility.

The UK government has strongly objected to the cap and believes that removing it will support London's status as a global financial hub. The challenges posed by Brexit have made it more difficult and expensive for UK-based banks to access Europe's extensive financial market, causing London to lose business to cities like Paris, Frankfurt, and Amsterdam.

The implementation of a cap on banker bonuses was one of the measures introduced by the EU to mitigate excessive risk-taking and enhance financial system stability. This action was prompted by the prevailing public sentiment of resentment, fueled by the fact that taxpayers were required to bail out banks while top dealmakers received exorbitant payouts. This sentiment was amplified by the economic downturn and subsequent recession, which resulted in job losses and home foreclosures for many individuals.

The London Stock Exchange Group's offices in the City of London, UK, are adorned with a sign on August 1, 2023.

Shares in one of London's largest Initial Public Offerings (IPOs) this year have plummeted by 82%.

The UK government's attempt to contest the cap in 2013 proved fruitless, as they argued that it would result in elevated fixed salaries, thereby hindering endeavors to establish a stronger correlation between banker compensation and long-term achievements.

The concerns expressed by Britain's financial regulators have been echoed, and on Tuesday, the PRA stated that removing the cap would improve the alignment of pay with performance. Additionally, it would enable firms to swiftly restructure pay, providing them with increased flexibility in managing their costs during downturns. UK Finance, a banking group, praised the removal of the bonus cap, noting that it would enhance global competitiveness and make the UK a more appealing destination for international professionals.

However, the spokesperson stated that the UK's extended deferral period, wherein certain executives have to wait for seven years to receive their awards, continues to discourage individuals from relocating to the UK. This is due to its longer duration compared to the EU.

"We are glad to acknowledge that the financial regulators will consider the deferral period as part of their comprehensive assessment of the remuneration system," expressed the spokesperson.

The UK government is facing mounting pressure to provide post-Brexit advantages for London, which is the hub of Britain's immensely significant financial services industry. Earlier this year, the city encountered a series of challenges when multiple British companies, most notably chipmaker ARM (ARM), disclosed their intentions to be listed in New York.