Sign up here for the latest investment banking news and analysis
The banker bonus cap “hasn’t really served its purpose” a senior Bank of England official has said, as it prepares to overhaul how some of the City’s highest-earning staff are paid.
“The cap could inadvertently lead to more, not less risk-taking,” Simon Hall, the Bank’s head of division for prudential policy told the City Remuneration Summit on 28 March.
The government is currently consulting on changes to the cap, which limits variable pay to twice base salaries in the UK banking sector, and is looking to diverge from the legacy EU laws in the wake of Brexit. Lifting the UK's long-held cap on banker bonuses could increase the gender pay gap in the sector, according to a BoE study into plans to abolish the rules, Financial News previously reported.
Hall told the conference that cash bonuses helped contribute to the financial crisis of 2008.
READ Bank of England says scrapping banker bonus cap could widen gender pay gap
Incentives were designed for “great profit, but not necessarily taking account of the longer-term risks if things went wrong,” he said.
There was a “lack of accountability”, he added, where individuals could “profit from high bonuses but not face the consequences if things went sour”.
The market overreached in the name of “quite elevated return on equity targets”.
The intention of the bonus cap was that it would curb excess risk-taking.
READ Top bankers could lose lucrative payouts in bonus cap overhaul
But Hall said, "unfortunately there isn’t much evidence that the cap has actually limited successive risk-taking".
The Bank’s research suggests what has actually happened as individual bonuses get closer to hitting the cap, firms have awarded role-based allowances as an element of fixed pay, Hall said.
These have been up to 15% in the following year.
Fixed pay changes give firms less ability to adjust if things go wrong, and a higher cost when responding to shocks, he added.
The bonus cap has been a dividing line between the Labour and Conservative Party in recent months.
Opening the conference, Linklaters’ global employment and incentives head Alexandra Beidas said the cap “hasn’t helped banks be flexible” but noted that there are political issues around removing it.
Recent bank collapses “make a lot of us question the future of remuneration rules” she added.
To contact the author of this story with feedback or news, email Justin Cash
