The UK Chancellor, Kwasi Kwarteng, has confirmed plans to remove the cap on bankers’ bonuses as part of a series of mini-budget announcements.

The banker bonus cap was introduced by the EU’s Capital Requirements Directive (CRD IV). The UK transposed it before Brexit into the remuneration chapter of the PRA’s rulebook and the FCA’s SYSC rules.

According to the Government’s Growth Plan, published today alongside the Chancellor’s mini-budget, the PRA will remove the cap which currently limits remuneration of certain bank staff to 100% of their fixed pay (or 200% with shareholder approval). The plan notes that pay in bonuses aligns the incentives of individuals with those of the bank which supports growth in the UK economy.

Technically, it is for the regulators to remove the ban from their rules. The regulators have not yet responded to today’s announcement. It is possible that the Government could use legislation to require the regulators to remove the ban by a certain deadline. For example, the Financial Services Act 2021 required the FCA to impose a duty of care on financial services firms by 1 August 2022. A similar requirement could be put on the regulators to remove the bonus cap.

The Financial Services and Markets Act requires regulators to consult on rule changes. Unless this requirement is waived by legislation on this occasion, we envisage that the regulators will launch a consultation to set out the proposed changes to their rules and invite feedback. Allowing time for this consultation process, we do not expect the removal of the cap to apply to the current performance year. Subject to further announcements from HM Treasury, our expectation is that the earliest the changes would apply would be the 2023 performance year for bonuses paid in 2024.

Separately, the Growth Plan also promises an “ambitious deregulatory package” for the UK financial services sector. As well as revisions to Solvency II, this package is expected to include more detail on how the Financial Services and Markets Bill will be used to repeal retained EU law relating to financial services and move the associated requirements into regulators’ rulebooks.