November 7, 2023

Banker’s Bonus Cap Removed – What does this mean for Employers?

Following the 2008 global financial crash, and in a bid to prevent future financial crises, the EU introduced regulations to cap banker’s bonuses to two times their annual salaries.

However, on 24 October 2023, The Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”) confirmed that this cap would be removed from the 31 October 2023. This article looks at why the cap was first introduced, the reasons behind its removal and the implication for employers within the financial services sector.


In 2014, the EU introduced regulations to limit the variable pay (such as bonuses) which banks, building societies and PRA-designated investment firms could award to individuals.

Firms were required to ensure that when awarding a bonus to anyone who was considered a “material risk taker” (meaning staff whose activities had the potential to expose the firm to risk), this did not exceed 100% of their fixed pay (meaning their salaries), or 200% with explicit shareholder approval.[1]

The aim of this cap was to avoid excessive risk taking by bankers and take the emphasis away from short-term gain over long-term stability.

The FCA and PRA opposed the cap during EU negotiations, arguing that this would place pressure on employers to increase salaries to compensate and would hinder a firm’s ability to adjust to changes in the markets, thereby putting a squeeze on a firm’s cash flow.

Despite this, the regulation was ultimately adopted through the UK’s then EU membership.

According to the FCA and PRA, it is thought that the bonus cap affects around 9000 “material risk takers”.

[1] Capital Requirements Directive (2013/36/EU) – CRD IV; and Capital Requirements Directive (2019/878/EU) – CRD V.


Proposal for Change

In 2022 the then-Chancellor, Kwasi Kwarteng, announced that the Government was looking to scrap the bonus cap for bankers, in the hope that global banks would view the UK as a more attractive place to do business.

This breakaway from EU legislation proved popular with the succeeding Government. The proposal was subsequently adopted by Jeremy Hunt and a consultation was carried out by the FCA and PRA.

The consultation paper[1], published by the FCA and PRA in December 2022, made a simple proposal – abolish the bonus cap. The paper also identified a number of reasons why the existing bonus cap was not fit for purpose:

  • There was no evidence that the bonus cap had reduced risk taking.
  • The cap had led to underinvestment in risky yet productive projects.
  • Fixed pay and salaries had increased, so that an individual’s total compensation remained the same.
  • Employers could not “claw back” or reduce remuneration in the instance that an employee was underperforming or had committed misconduct.
  • Bonus caps are not used outside the EU, meaning the cap hindered the UK’s international competitiveness and limited labour mobility.

[1] CP15/22 – Remuneration: Ratio between fixed and variable components of total remuneration (‘bonus cap’) | Bank of England

Cap Scrapped

With the FCA and PRA position clear, there was no surprise when the announcement came on 31 October that the cap would be scrapped.

What does this mean?

Firms will now be able to decide the ratio between fixed and variable pay for “material risk-takers”. However this must be appropriate (however that is defined); and, when deciding the ratio, firms should take into consideration the business activities of the firm and the employee-in-question’s role. The removal of the cap will apply to current and future performance years.

Whilst this announcement has not been well-received, particularly against the backdrop of the current cost of living crisis, those within the banking and finance sector will welcome this news. But what does it mean for employers?

Impact on Employers

The removal of the cap means that banks, building societies and PRA-designated investment firms have more freedom to restructure and vary their remuneration. Firms can look to reduce salaries and incorporate higher discretionary bonuses.

Larger bonuses will mean that any clawback and malus provisions within employment contracts have a greater effect.

A malus provision enables an employer to reduce a bonus prior to paying it, whilst a clawback provision will mean a firm can reclaim part or all of a bonus after it has been paid. Provisions of this nature allow firms to reduce bonuses in light of misconduct, poor performance or even a downturn in the firm’s financial performance.

The FCA and PRA have always required those within the banking and finance sector to use malus and clawback provisions, to discourage excessive risk taking[1]. However, larger bonuses will mean these provisions have a greater impact, thereby incentivising employees to meet their performance targets, act in a way that promotes long-termism and ensure they effectively manage risk.

Lowering fixed pay and allowing for higher variable bonuses will also allow firms to adjust better to poor market/financial conditions and company performance. There is also the benefit that firms will be able to attract and retain talent by providing heftier bonuses.

However, employers won’t be able to unilaterally change salaries for existing staff, unless they obtain the employee’s consent, or else risk legal action in the form of either a claim for breach of contract or constructive dismissal. Changes to salary will therefore need to be made incrementally, either implementing lower salaries to new hires or consulting employees to agree changes to their fixed salaries, in exchange for higher bonuses.

Firms also need to be aware of other remaining curbs on bonuses. Despite recent headlines, the financial services sector still remains one of the most heavily regulated when it comes to the paying and quantifying of bonuses. In their policy statement[2], the FCA and PRA reminds firms they are still required to follow rules such as ensuring that fixed and variable remuneration remains “appropriately balanced” and that at least 40% of bonuses are deferred for a minimum of 4 years (or longer in some cases).

So are we going back to the bad old days of overinflated bonuses and over remunerated bankers? Time will tell…

This article was written by Gemma Ospedale, Partner in the London Employment Team, with contributions from Gemma Moore, Trainee Solicitor.

Disclaimer: This article is intended for educational purposes only and does not constitute legal advice.


[2] PS9/23 – Remuneration: Ratio between fixed and variable components of total remuneration (‘bonus cap’) | Bank of England

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