The imposition of the bankers’ bonus cap has had “precisely the opposite effect” to what regulators intended, the head of the UK’s main banking regulator said today, as he sought to defend the government’s decision to scrap the cap.
Sam Woods, head of the Prudential Regulation Authority (PRA), said that while scrapping the bonus cap is probably the “single most unpopular thing we have proposed”, he defended the policy suggesting that it could actually lower the total rate of bankers’ pay.
“The only effect of that cap has been to increase the fixed pay of bankers,” Woods told MPs today. “As bankers come up close to the cap… in the following year, their base pay gets a boost of about 15 per cent.”
Dropping the cap would make banker’s total take home pay more closely related to their performance, as bonuses could be handed out or withdrawn on a more frequent basis, Woods suggested.
Regulations on the bonus cap were imposed by the EU in 2014 after the financial crisis. It caps bonuses at 100 per cent of annual pay, or 200 per cent with shareholder approval.
But the government said it would scrap the cap as part of the wider Edinburgh Reforms – a package of over 30 reforms designed to free-up the UK’s financial services sector after Brexit and boost growth – that were announced in early December.
Other proposals include overhauling the EU’s Solvency II rules and reforming the bank ring-fencing regime.
Yesterday, governor of the Bank of England Andrew Bailey said the planned reforms to Solvency II would increase the risk of life insurance companies collapsing by 20 per cent, from 0.5 per cent to 0.6 per cent.
Woods said today that it’s a matter of “perspective” how to interpret the level of risk, admitting it could be seen as “a change from one relatively small number, to another relatively small number”.
The PRA and the government have been at loggerheads on the implementation of Solvency II reforms, but Woods told MPs that “we accept the government has reached its final view… we need to get on with this.”
Woods also said that it was important to maintain a ring-fencing regime – which separates retail and investment banking assets to protect the retail side from riskier forms of lending – because it was “good for competitiveness” and allowed London to be “extremely open” in wholesale banking.
The government is currently proposing to increase the threshold at which the regime applies to £35bn and allow banks with a small amount of exposure to bypass the rules.
Woods conceded that the government’s proposals on the issue would not have a major impact on financial stability, although he warned that going further would pose risks.