A cap on bonuses for bankers is set to be scrapped in a bid to make the UK a more attractive financial hub post-Brexit, financial regulators have ruled.
It prompted critics including the Labour Party to attack the “out of touch” move as households grapple with higher bills and living costs.
The decision will remove the limit on bankers’ annual payouts from the end of October, the Financial Conduct Authority (FCA) and Bank of England’s Prudential Regulation Authority (PRA) said.
Current rules limit bonuses to 100 per cent of the salary for employees of banks or building societies, or double with shareholder approval.
The regulations were introduced by the European Union in 2014 as part of efforts to avoid the 2008 financial crisis.
“Limiting Labour mobility”
But other leading financial centres outside the EU do not impose a cap, therefore making the UK a less competitive place when it comes to attracting top talent, the PRA found after consulting on the rule.
“The bonus cap has been identified as a factor in limiting labour mobility,” it concluded.
The PRA 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, it said.
The decision comes a year after former chancellor Kwasi Kwarteng first revealed plans to change the bonus rules, which he said would encourage global banks to create jobs, invest and pay taxes in the City.
He said the bonus limit was pushing up basic salaries and driving activity outside Europe.
But the decision has faced a backlash for rewarding bankers and failing to address cost-of-living concerns affecting households across the UK.
Cost of living crisis
Darren Jones, Labour’s shadow chief secretary to the Treasury, said: “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.
Furthermore, think tank the High Pay Centre argued that scrapping the bonus cap will only benefit a handful of the UK’s “super rich”.
Millionaire bankers
Executive director Luke Hildyard said: “The UK already has more millionaire bankers than the whole of the EU put together yet our economy is stagnant and our public services are in crisis.
“Whether or not the bonus cap was an effective policy measure, we can’t rely on the outsized incomes of a handful of super-rich bankers trickling down to lift slumping living standards for the wider population.”
In response to the decision, a spokesman for the Treasury said: “Decisions on remuneration in the banking sector are for the PRA as the independent statutory regulator.”
Downing Street too appeared to distance 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.
Related: Inflation to fall markedly this month, says Bank of England governor