In a joint policy statement published on 24 October, the FCA and PRA have confirmed that they are removing the existing maximum limit on the ratio between fixed and variable remuneration, commonly referred to as the ‘bonus cap’ .  

The cap applied to banks, building societies and a small number of PRA-designated investment firms, who were prevented from paying bonuses of more than 100% of fixed salary, or 200% with shareholder approval.  The cap will be removed with effect from 31 October.   It does not directly affect solo-regulated FCA firms.

The removal of the cap was first proposed by Kwasi Kwarteng, during his brief but eventful spell as Chancellor, to address a perceived barrier to international competitiveness, as it was claimed that a bonus cap prevented the City of London from attracting the best global talent, who ultimately sought out more lucrative bonus packages in the likes of New York, Singapore and Zurich.  At the time this was viewed as a politically difficult and somewhat surprising proposal, given that the sector had not been pushing for its removal and apparently had not been consulted on the move.

The PRA considers that the change advances the PRA’s safety and soundness objective as firms will be able to restructure pay faster and give them further flexibility over their cost base to deal with downturns. The FCA acknowledge the potential fillip to competitiveness, but emphasise that the move is intended to address the unintended consequences of the cap, namely that base salaries have risen significantly as a proportion of overall remuneration, which limits firms ability to adjust overall pay in response to losses, poor performance or misconduct.  

The regulators anticipate that firms will restructure pay over time in response to the new freedoms, and the removal of the cap is potentially significant, at least in the longer term. However, in reality it will be difficult simply to switch back to the previous pattern of higher bonuses and lower base salaries, so seismic change in pay structures looks unlikely.

This article was co-authored with Orlaith Mallen.