Bankers’ bonus cap to be scrapped next week as Britain ditches EU rule in post-Brexit shake-up of City regulations to help London compete with New York, Paris and Frankfurt

The cap on bankers’ bonuses is to be scrapped next week as part of a post-Brexit shake-up of City rules, it was announced today.

The measure, which limited bonuses to two times an employee’s annual salary, was introduced by the European Union after the 2008 financial crisis.

City regulators have confirmed Britain will abolish the rule on October 31 following the UK’s exit from the Brussels-based bloc.

It comes little more than a year after Kwasi Kwarteng first revealed plans to scrap the bonus cap as part of his disastrous ‘mini-Budget’ when he was briefly Chancellor.

Most of the measures in Mr Kwarteng and ex-prime minister Liz Truss‘s ill-fated ‘Growth Plan’ were subsequently scrapped amid economic turmoil.

But the move to abolish the cap survived after Rishi Sunak, a former Chancellor and investment banker, took over from Ms Truss in Downing Street exactly a year ago tomorrow.

Mr Kwarteng had argued at the time that lifting the limit will help London to compete with other global financial hubs such as New York, Paris and Frankfurt.

Labour criticised the move to loosen rules on bankers’ pay amid the cost-of-living crisis hammering households.

The Financial Conduct Authority (FCA) and Bank of England’s Prudential Regulatory Authority (PRA) this afternoon confirmed the current cap will be lifted next week.

The PRA found the limit was making the UK a less competitive place when it comes to attracting top talent, as other leading financial centres outside the EU do not impose a cap. 

The regulator also said that the cap was having the opposite effect of driving up staff salaries that are not linked to the long-term performance of a firm.

Higher wages therefore cannot be reduced or ‘clawed back’ if a failure or previous misconduct issue later comes to light, the PRA added.

In a policy statement on next week’s changes, the FCA said: ‘The bonus cap does not limit total remuneration but limits the variable remuneration a firm can pay relative to an individual’s fixed pay.

‘This has the effect of limiting the proportion of remuneration that can be adjusted by risk and performance measures.

‘The removal of the bonus cap gives firms the freedom to restructure their pay over time, within the framework of the regulators’ rules on variable remuneration which aim to better align remuneration with prudent risk-taking.’

During his mini-Budget speech last September, Mr Kwarteng announced the move to scrap the bonus cap and told MPs: ‘We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.

‘All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe.

‘It never capped total remuneration, so let’s not sit here and pretend otherwise. So we’re going to get rid of it.’

Responding to today’s confirmation of the bonus cap being lifted, Labour’s shadow chief secretary to the Treasury, Darren Jones, said: ‘Rishi Sunak is marking his anniversary of becoming PM by pushing ahead with Liz Truss’ plan to axe the cap on bankers’ bonuses.

‘When Truss says jump, Sunak says how high. At a time when families are struggling with the cost of living and mortgages are rising, this decision tells you everything you need to know about the priorities of this out-of-touch Conservative Government.’

Paul Nowak, general secretary of the TUC, criticised the ‘obscene’ decision to lift the bonus cap when ‘City financiers are already enjoying bumper bonuses’.

‘At a time when millions up and down the country are struggling to make ends meet – this is an insult to working people,’ he said.

A spokesman for the Treasury said: ‘Decisions on remuneration in the banking sector are for the PRA as the independent statutory regulator.’

Downing Street also attempted to distance Government ministers from the change.

‘The Government’s position is that regulatory independence is important and we don’t intend to cut across that independence,’ the Prime Minister’s official spokesman said.