Bonus Freedom to Pay Modest ‘Brexit Dividend’ for Britain’s Banks – Reuters

By Sinead Cruise and Huw Jones

LONDON (Reuters) – Starting in January, banks in Britain may be granted the ability to offer even larger bonuses. However, experts suggest that these new pay incentives are unlikely to elevate the country’s financial sector above its global competitors, as many top bankers remain hesitant to replace their reliable fixed salaries with potentially unpredictable bonuses.

The decision to abolish the nearly decade-long cap on bonuses is a key aspect of Britain’s regulatory changes following Brexit. These changes are designed to revive the financial industry and move away from the European Union protocols that aimed to curb excessive risk-taking after the global financial crisis resulted in substantial taxpayer bailouts for banks.

A resolution from the Bank of England and Financial Conduct Authority regarding the proposed removal of bonus restrictions is expected in the coming weeks. This change would affect bonuses earned in 2024, with the possibility of retroactively including bonuses from 2023.

Government officials and regulators believe this move will help attract more experienced bankers to Britain and enhance London’s status as a financial hub, competing against cities like New York, Singapore, and EU centers such as Paris and Frankfurt. However, analysts, including bankers, lawyers, and compensation consultants, argue that potential losses may outweigh the benefits for high-earners.

"Removing the cap isn’t likely to lure more top bankers to the UK because the uncertainty around pay is a deterrent," said Luke Hildyard, director at the High Pay Centre think tank.

Data from the European Banking Authority indicates that prior to Brexit, more than 70% of EU-based bankers earning over 1 million euros and subject to the bonus cap were located in Britain. The current bonus structure allows for a maximum of 100% of fixed pay, or 200% with shareholder consent, leading some UK banks to introduce bespoke role-based allowances to remain competitive on the global stage. Regulators have pointed out that this practice complicates efforts for banks to manage costs and absorb losses during downturns.

Despite the removal of the bonus cap, many bankers are likely to resist giving up their guaranteed salaries for bonuses that can fluctuate significantly based on economic conditions. Suzanne Horne, head of International Employment at Paul Hastings, expressed skepticism about a significant return to the pre-financial crisis environment of low base pay and high bonuses. She noted that given the current cost of living crisis and high inflation, any major changes to a bank’s bonus system would likely provoke controversy.

With the UK set to eliminate the bonus cap, the EU could stand out as an exception. Other regions, including the United States and Singapore, employ various strategies to discourage excessive risk-taking, which Britain plans to maintain. These mechanisms include delayed bonus payments, where a portion is issued in cash upfront and the balance in bank shares that only mature over several years, allowing for potential "clawbacks" in cases of misconduct.

The sensitive nature of bonus discussions is compounded by broader financial challenges facing many citizens. Some banks are already facing backlash for their decision to close accounts or not pass on increased interest rates to savers. A senior banker from an international lender remarked that discussing bonus changes is politically risky, especially with a general election expected in 2024.

Major shifts in compensation practices could prove difficult, as salary structures are typically defined in contracts that would require employee consent to amend. However, Horne noted that willingness for such consent may increase in light of recent widespread layoffs in the banking sector along with contractions and mergers.

The consultation on the proposal suggests removing the cap would strengthen Britain’s reputation as a favorable business environment. Still, it’s uncertain whether EU bank subsidiaries in the UK would continue to be bound by the bloc’s regulations or if the EU might react by complicating access for London’s financial sector.

Simon Patterson, managing director at Remuneration Associates, indicated that while the changes could suit U.S. firms wanting to relocate staff from New York to London, European banks may be cautious to avoid creating disparities in compensation or provoking regulatory demands to move more employees to the EU.

Others cautioned against overestimating the importance of bonuses in stimulating growth within Britain’s financial sector, which continues to feel the effects of high-profile listings being lost, such as that of Arm Holdings. Christian Edelmann, Managing Partner at Oliver Wyman, emphasized that compensation is just one factor amid the larger ecosystem essential for a thriving financial sector.