The restrictive bonus cap is finally loosening

 
Tracey Boles
A man holds several US dollar and UK ste...
The bonus cap is preventing banks like BBVA from hiring talented executives (Source: Getty)

It's time for the UK to throw off the EU's restrictive bonus cap. The cap may have been brought in with the best of intentions following the financial crisis – curbing excessive rewards for risky trading behaviour – but it has turned out to be increasingly counterproductive.

This week, an unintended consequence has emerged that serves to strengthen the case against the cap which, in broad terms, sees bonuses limited to twice fixed pay for “risk takers” or those earning more than €500,000 a year.

BBVA, one of the most technology-savvy banks in Europe, is concerned that the bonus cap is preventing the group from hiring talented executives from the tech sector or on acquiring promising fintech start-ups. The Spanish bank has written to two European commissioners to complain that the increasingly high pay of tech specialists means more are being caught by the rule, even though they pose no systemic risk.

Read more: Three job titles which will earn you a bigger bonus than a chief executive

This gives US banks or tech companies without a cap an advantage in the marketplace. BBVA is looking for a tighter definition of risk takers.

The bonus cap has been around since 2014. Former chancellor George Osborne unsuccessfully challenged it in European court but the UK's decision to exit the EU may provide a fresh opportunity to scrap the rule. However, should the UK want to keep single market access, the cap may have to stay – subject to negotiations. This is because of so-called equivalence rules: if the UK gets rid of any part of the European bank directive, including the cap, then terms with Europe cease to be equivalent.

Read more: Brexit bonus predicted for investors after sterling devaluation

Ironically, the agent for change may actually be Brussels itself. The EC is poised to review the post-crisis financial-regulation framework on the grounds it may be harming competition. The EU has already conceded that the bonus rules are too costly and cumbersome for smaller firms.

Alternatively, the City may gradually evolve beyond the cap as it seeks innovative ways of remunerating staff. Yesterday, it came to light that Neil Woodford, the star stock-picker and founder of Woodford Investment Management, is eschewing bonuses in favour of a flat but higher salary for his staff.

Whatever the delivery method may be, the bonus cap is loosening, and not before time.

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