UK regulators have moved to scrap the cap on bankers' bonuses from the end of this month, following ten months of examination.
The Financial Conduct Authority approved the changes as part of its joint review with the Prudential Regulation Authority to examine the existing limits on the ratio between fixed and variable components of total remuneration - ‘the bonus cap'.
The current policy cap was first introduced in 2014 and former chancellor of the exchequer Kwasi Kwarteng vowed to overhaul the rules in the government's Mini Budget.
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The revision will also apply to bonuses in building societies and PRA-designated investment firms.
Originally the rules placed limits on bonuses for employees to two times base salary in an attempt by the EU to deter the risky behaviour that led to the 2008 Global Financial Crisis.
The FCA said removing the cap will "give 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".
Simon Morris, a financial services partner with law firm CMS, said removing the cap was "good news".
The revision marks a major step in the UK's divergence from the EU post-Brexit, Morris noted: "It gives the banks rather than Brussels the power to structure the proportion of fixed and variable remuneration and use this as a tool to better manage the risks they face. It also brings Britain back into line with the global banking community."
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Adrian Crawford, employment partner at law firm Kingsley Napley LLP, added that by scrapping the cap it would allow banks to reduce or eliminate role-based allowances and instead pay higher bonuses instead, in turn enabling them to lower fixed costs and pay more to higher performing staffers.
"Bonuses are normally paid out over a number of years and are subject to malus and clawback so a higher proportion of bankers' pay will be at risk and it will often remain at risk over a long period of time," Crawford said. "Not all bankers will welcome the change."
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The scrap does not mean that firms can run free with bonus levels though, as they will still be required to abide by the remuneration code, which requires firms to structure pay to promote effective risk management, ensure alignment between risk and individual reward, support positive behaviours and healthy firm cultures, and discourage behaviours that can lead to misconduct and poor customer outcomes.
"This may lead to a greater number of disputes over the exercise of malus and clawback powers," Crawford said.
"In view of changes in the regulatory environment, this is not so much turning the clock back as moving into a new environment with the banks having more freedom but still being subject to significant constraints."
