The UK Might Scrap Cap on Bankers’ Bonuses EU Rule after Brexit
The EU rule that places a cap on bankers’ bonuses might, in the long run, get scrapped after the Brexit. This is according to Mark Carney, the Bank of England governor in his most recent statements.
Carney, who has long been a major critic of the EU bonus rules, outlined the cap as one of the several changes which could be effected to the overall financial laws once the anticipated March 2019 exit of the UK from EU succeeds.
EU introduced the alleged financial cap in 2014 January. The bonus cap was then a reaction to the financial crisis that resulted in bankers receiving multi-million payouts in spite of the massive losses. With this cap, payouts are limited to 100 % of salary or 200 % the later after the shareholders have explicitly approved it.
In addition, Carney, in his statement at the industry event in London, also further emphasized that there was a need to take a stern regulatory stand on the sector since it could double to approximately 20x the overall GDP over the next few decades.
He also outlined that the EU rules could also be subject to several alterations as well. Together with the bonus cap, Carney also identified other laws, particularly insurance regulation-related rules, as well as those that influence smaller banks as among the few which could also be revised. His statement also pointed out that there are certain areas where they would make some alterations although the changes would still be aimed at maintaining the overall resilience levels.
Since its introduction back in 2014, the cap on bankers’ bonuses rule has been a significant source of controversy in the UK. In fact, George Osborne, who at the time was the chancellor, went on to complain to the EU Justice Court alleging that the cap would render the sector relatively riskier, a mission he, however, gave up on one year later.
In his complaint, Osborne had highlighted that the cap on bankers’ bonuses rules was poorly crafted rules that are pushing the bankers’ pay upwards rather than bringing it down as well. According to Carney, these rules make the task of penalizing bankers more harder, subsequently rendering it more challenging to slash down bonuses either because of misbehavior or due to poor performance.
The governor outlines that if the new European financial rules are for instance implemented where bonuses are capped to half or a subsequent two-thirds of the overall pay is capped off, where shareholders have given the go-ahead, they could lead to an undesirable effect like a limit to the scope for remuneration to be reduced.
The Bank of England did a study in 2015 on the bonus cap and identified that fixed pay like benefits and salaries only made up of 50 % pay compared to 2010 where it made for 10 %. The reason for this, according to the assessment, was because banks in response to this cap went on to introduce llowances’ together with bonuses and salaries as compensation to any drop in pay the restriction may have caused.
Currently, besides the bonuses, major UK banks chief executives now receive share awards as well. For instance, Lloyds Banking Group CEO, Mr. António Horta-Osório, currently pockets a £900,000 ixed share award,’ an amount which he receives in equal tranches over the span of five years. This is not to mention a subsequently fixed salary of £1.2m plus bonuses and benefits.
Carney, nonetheless, did not point out that there was any work underway relative to revising the cap. He has also further outlined that he is not of the opinion that other financial laws should be watered down. In a statement to the Guardian in August, he stated that they have no plans of going to the least common denominator in relation to the regulation, especially with the UK’s dominant financial sector.
It has been recently suggested that the UK should re-introduce the City regulation, especially now with Brexit in efforts to help retain businesses which could otherwise be lost. Several major banks are making exclusive preparations to ultimately put into effect their contingency plans mainly if there is no consensus in the coming weeks on a transition deal.
Another bank official has also warned that close to 10,000 roles may also initially go.