Couples going through or contemplating divorce, should consider how uncapping bankers’ bonuses in the UK will affect financial settlements. The author of this article spells out the issues in play.
One of the changes made by the short-lived UK government of Liz Truss and her finance minister, aka Chancellor, Kwasi Kwarteng, was removing the salary cap on bankers’ bonuses. The cap had been introduced by the European Union amidst the global financial crisis a decade ago. Banks were bailed out by the taxpayer, and politically, the public was furious (with reason) at how imprudent lending and risk controls had helped generate the financial smash.
Truss feared – also with justice – that salary caps and high tax rates were a turnoff for those seeking to work in the City, and also a competitive burden after the UK’s breaking free of the EU. But fellow Conservative MPs thought that, after the lockdowns and amid rising inflation, taking these steps did not look good. The “optics” – to use a popular epithet, were poor. However, the removal of the cap has not yet been reversed by the new Rishi Sunak administration. This week, new finance minister Jeremy Hunt is slated to reveal his budget measures. The package is expected to involve higher taxes and spending cuts.
With pay caps gone, what are the implications for potential divorce settlements when one of the parties works in the affected financial sector?
One of the enduring parts of the “mini-budget” of ex-prime minister Liz Truss and her former chancellor Kwasi Kwarteng (and perhaps one of the most controversial given the cost of living crisis), is the proposed scrapping of the bankers’ bonus cap. New Chancellor Jeremy Hunt has stated his commitment to sticking with the policy.
The bonus cap, which imposed limits on the variable discretionary elements of bankers’ remuneration, was brought in by the European Union (via the Capital Requirements Directive) following the financial crisis of 2007/2008 and applies to UK banks, building societies and designated investment firms. Lifting the cap, which is of course now possible following Brexit, is said to be about encouraging banking talent and investment to the City of London. It will even increase the tax take from bankers, Hunt has stated.
When, and whether, the proposed uncapping will come into force remains to be seen. Given the need to publicly consult, it’s unlikely that any changes will be brought in before the banks announce bonuses for 2022 performance (typically in the early months of next year), but the proposal will no doubt force banks to review their remuneration packages in time to attract and retain talent and may bring about a review of other allowances too (for example “role-based allowances”) which emerged to compensate for the limitations on bonuses.
For anyone divorcing a banker or for a banker who faces divorce, the banker bonus cap has other implications. Bonuses have long influenced how divorce settlements are calculated and how payments are made, so can we similarly expect a divorce knock-on effect when the cap is lifted?
In England (and Wales), where spousal maintenance orders on divorce are common (unlike many other jurisdictions – including our northern neighbours, Scotland – where maintenance is rare), anticipated bankers’ bonuses (based on historic performance) are routinely fed into the maintenance calculations to assess the payer’s (typically the banker’s) income and the level of maintenance to the recipient (normally the wife or homemaker) and any children.
In the past, in family cases involving a banking spouse and when bonuses could be in the £s millions (and certainly several times salary), it was not unusual for judges to order uncapped percentages of bonuses, enabling a wife for example to receive some fixed maintenance plus a percentage, say 25%, of the husband’s future bonuses sometimes on a joint lives basis (paid until the recipient’s remarriage unless varied in the meantime), the judge anticipating that either spouse could apply to vary in the future if required.
Given the structure of bonus packages (including restricted shares vesting over several years), implementation on an ongoing basis could be complicated and involve ongoing negotiation. However, it was largely this approach to maintenance by the English courts which helped support London’s reputation as the “divorce capital of the world.”
Over recent years, partly due to the courts wanting to reduce continued dependency between divorced couples and partly due to needs becoming the only focus of maintenance awards, things have changed. Joint lives orders are now rare. It has become incredibly difficult for wives to achieve maintenance orders in excess of their needs, with the highest of bars now required to achieve extra for “compensation” for giving up a lucrative career to bring up the family for example.
In the new world if there is insufficient capital to allow an immediate termination of maintenance claims (called a “clean break”), term orders until a future date (say 65 or the payer’s retirement) are common. Orders involving bonuses will only be made if a share of the salary does not meet needs and will provide for the wife receiving a capped bonus, i.e. a percentage but with a cap on how much she receives.
Paradox of certainty
As a family lawyer routinely advising City professionals or spouses of City professionals over their divorce, I would argue that the EU enforced introduction of a bonus cap has actually brought more certainty in banking-related divorce cases. The increase in salaries (given that bonuses have been restricted) has reduced the difficulties faced by widely varying bonuses year-on-year. But I should emphasise that bankers are only one group of City professional and high bonuses remain a feature of many other City-related cases, for example where a spouse is employed by an investment firm such as a private equity or hedge fund and where the EU cap does not apply.
If the bonus cap is to be removed and bankers’ bonuses start to return to the eye-watering figures we last saw in the 1990s and noughties, will we in turn see a return of old style divorces?
In my view we won’t. In recent years the notion of ex-wives in England having “meal tickets for life” has certainly been debunked, not least by the limitations placed upon applicants to seek in excess of 50% capital if that capital meets their needs (even if this means that they will immediately need to draw down on their capital to meet their expenditure while their former spouses are going to continue to earn significant income thereby enabling them to leave their capital intact). And so, while bonuses for bankers may well increase significantly if the government stands by its pledge, it is unlikely that there will be a return to the old days of uncapped bonuses for ex-wives.
But if salaries are reduced and the bonus element of remuneration starts to increase year-on-year, might we see claims for a variation of existing maintenance orders? Quite possibly. Another feature likely to emerge is a return to orders sometimes seen in high bonus cases where one of the parties seeks accelerated maintenance (including a share of the bonus) over a shorter period of time to allow maintenance to be terminated earlier than retirement (to achieve, “the clean break” earlier than retirement).
So, as we watch to see how the City responds to the proposed uncapping of bonuses and the timescale for this taking effect, bankers or their spouses (who have already divorced or who are considering divorcing) might be wise to consider how any changes to their remuneration structure might affect their settlement. Whilst we are unlikely to see a turn-back-the-clock effect in big bonus divorces, there will certainly be financial considerations in the way orders are structured to be taken into account.
Charlotte Bradley, Partner and Head of Family & Divorce at Kingsley Napley.