Big Bang 2.0 sees bankers’ bonuses under review
15 September 2022
Steps towards deregulation
The UK was never in favour of the bonus cap, which was introduced in 2014 as part of a package of the EU Directive (CRD4) pay reforms to curb excessive risk taking by bankers and to implement more risk-aligned reward following the financial crisis. The reshuffled Government’s concern is that the cap drives up banks’ fixed costs and that it is deterring key global talent from moving to the UK, making it a less attractive base than the U.S. or Asia. So now, in what is being called “Big Bang 2.0”, the Treasury is looking at scrapping the bonus cap as one way of attracting more banks and bankers to the UK. While this will certainly prove controversial, given the regulatory motive behind the bonus cap, it could be argued that other UK regulations, such as the senior managers and certification regime, and the gold-plated UK provisions on deferral and malus and clawback, are sufficiently effective to hold bankers to account for their conduct, if it were to go.
This is a bold step by the UK Government, and one that will be politically sensitive in the context of its ongoing market access negotiations with the EU. There is no further detail at the moment, but it can be expected that the Treasury and Prudential Regulation Authority will consult on any proposals. These will need to be formulated carefully, given the current economic climate, and the likelihood that any hint of a return of “fat cats” and their bonuses would not be well-received by the general public in times of austerity.
For banks, the removal of the bonus cap would bring fresh challenges and require a review of remuneration structures. It may entail an unpicking (likely over time rather than in short order) of the fixed pay allowance structures that were put in place to mitigate the impact of the cap, and raise level playing field considerations for UK-based banks that apply the cap to staff in other EU jurisdictions (such as the risk of legal claims from those whose bonus potential is lower than that of their colleagues). It would also pave the way for changes in bank compensation design, which may be welcomed by many. However, these changes could bring additional employment law considerations and challenges, including in relation to changing terms and conditions, equal pay and gender pay gap issues as well as more thorny questions around the exercise of discretion. We will update you as developments unfold.