Analysis-Bonus freedom to pay paltry ‘Brexit dividend’ for Britain’s banks

By Sinead Cruise and Huw Jones

LONDON (Reuters) – Banks in Britain may be free to award even bigger bonuses from January but new pay perks are unlikely to help the country’s financial industry outshine its rivals because top bankers are wary of swapping handsome fixed salaries for uncertain rewards.

Scrapping the near decade-old cap on bonuses is a core plank of Britain’s post-Brexit easing of rules the European Union adopted to stop excessive risk-taking after taxpayers had to bail out banks in the global financial crisis.

The outcome of a Bank of England and Financial Conduct Authority consultation on the proposal to remove curbs on bonuses is due in coming weeks. It would apply to payouts earned over 2024, though bringing forward the start to cover bonuses for 2023 is an option.

Ministers and regulators hope this will attract more top-level bankers to Britain, and bolster London’s appeal as an international capital hub as it competes with New York, Singapore, and EU financial centres such as Paris and Frankfurt.

Bankers, lawyers and remuneration consultants say, however, high-flyers may lose more than they stand to gain.

“Removing the cap isn’t going to attract more top bankers to the UK because their pay will be more uncertain,” Luke Hildyard, director at the High Pay Centre think tank, told Reuters.

According to the latest data from the European Banking Authority, more than 70% of EU-based bankers earning over 1 million euros and subject to the bonus cap, were based in Britain before it left the bloc in 2020.

A limit on bonuses of 100% of fixed pay – or 200% with shareholder approval – has encouraged some UK banks to supplement base salaries with bespoke and often undisclosed, role-based allowances, or RBAs, to make compensation more competitive globally.

This, regulators say, makes it harder for banks to cut costs and absorb losses in a downturn.

But many bankers are expected to resist swapping guaranteed pay for potentially higher bonuses, which can swing wildly across economic cycles.

“I very much doubt there’ll be a dramatic shift back to the pre-financial crisis days of low base salaries and high bonuses,” Suzanne Horne, head of the International Employment practice at Paul Hastings, told Reuters.

“We have a cost of living crisis, high inflation, industrial action by the public sector unseen since the 70s … any announcement of sudden changes to a bank’s bonus structure will likely prove controversial.”

With Britain scrapping the bonus limit, the EU would become a global outlier. Countries, such as the United States, Singapore, Japan and Switzerland use other mechanisms to deter excessive risk-taking, which Britain will continue to apply.

These include ensuring only a portion of a bonus is paid upfront in cash, with the rest paid in bank shares that can only be cashed in over several years, making it easier to “claw back” awards in cases of misconduct.

TOXIC CONVERSATION

Bankers say that shining a spotlight on bonuses is never good for them, particularly at a time of stretched finances for millions of people. Some banks are already battling negative headlines for shuttering accounts and failing to pass more of higher interest rates to savers.

UK Finance, the industry body for banks in Britain, did not respond to the public consultation, leaving individual members to comment if they wanted to.

“You can’t imagine a more politically toxic subject for conversation. This has never been a banking industry request and we don’t want this to be the conversation in an election year,” a senior banker at an international lender said, alluding to an anticipated UK general election in 2024.

Quickfire compensation revamps will be difficult in practice, since higher base salaries are baked into contracts and require employee consent or a change in role.

“That said, it is possible that this consent may be more than forthcoming against a backdrop of significant redundancies at the banks in the first part of 2023, coupled with bank collapses and mergers,” Horne said.

According to the public consultation, scrapping the cap would support Britain’s pitch as a “place to do business”.

But it is unclear whether subsidiaries and branches of EU banks in Britain would still be bound by the bloc’s cap and whether the EU might respond, for example by making improved access for London’s financial sector even less likely.

Simon Patterson, managing director at Remuneration Associates, said the change might help U.S. firms keen to move staff from New York to London, but European banks may eschew changes to avoid creating a two-tier compensation system or tempting the EU to demand relocation of more UK staff to the continent.

“Not much will change where companies are moving staff to operate in the EU,” he said. “The EU is, after all, ramping up requirements that say ‘presence’ is not simply window-dressing.”

Others warned against overplaying the significance of bonuses in Britain’s battle to grow its financial sector, still reeling from the loss of big-ticket listings, such as Arm Holdings.

“Compensation is a small point in the grand scheme of things of a vibrant financial sector. The broader ecosystem matters when it comes to competitiveness,” Christian Edelmann, Managing Partner, Europe at Oliver Wyman, said.

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