Out-Law News 1 min. read

Equal pay claim risk from UK bankers’ bonus cap reversal, says expert


Banks should be mindful of the risk of equal pay claims if altering remuneration practices in light of the scrapping of the bankers’ bonus cap in the UK, an employment law expert has said.

Anne Sammon of Pinsent Masons was commenting after the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) confirmed that the cap on bankers’ bonuses that has been in place since 2014 would be lifted from 31 October 2023.

The cap, which was set by the EU, limits the bonuses of banking staff who are ‘material risk-takers’ to 100% of their fixed pay – or 200% with shareholder approval. The PRA and FCA, however, said the bonus cap “has been identified as a factor in limiting labour mobility”. They cited the fact that bonus caps are “not routinely imposed in other leading international financial centres outside the EU”.

The two regulators issued a joint policy statement confirming the change, following an earlier consultation exercise.

In the statement, the PRA said the change will advance its regulatory objectives of safety and soundness in the financial system. This is because “firms will be able to restructure pay faster and the change would give firms further flexibility over their cost base to deal with downturns”. It also said it would help facilitate effective competition.

The FCA said the change “would mainly advance its integrity and competition objectives”, including by ensuring there is “a better alignment of incentives and financial rewards with principles of effective risk management, good conduct, and the long-term interests of the firms”. It added that it is likely to help discourage “behaviours that can lead to misconduct and poor customer outcomes”.

Sammon said, however, that there are employment law implications for banks to consider as a result of the change in policy.

“There is risk associated with creating a two-tier workforce where new employees are paid lower salaries but with higher bonus potential. In particular, firms will need to be mindful of flouting equal pay laws in these circumstances – where employees are doing similar roles but being paid lower salaries. Even if total compensation, the lower salaried employee can, in some circumstances, bring an equal pay claim on that basis.”

"Those who received increases to fixed pay when the bonus cap was introduced will be contractually entitled to those higher salaries and so will only give those up where they are offered some incentive to do so. Assuming that the rules around guaranteed bonuses remain as they are, firms won’t be able to guarantee future bonuses. It is difficult to see what might be offered to persuade employees to accept lower salaries,” she said.

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