LONDON, Sept 15 —Scrapping a cap on banker bonuses would be the strongest signal yet that Britain’s new Prime Minister wants to ‘unshackle’ London from EU rules, but risks public outcry while potentially doing little to bolster the City’s short-term appeal.
London’s financial hub was largely cut off from the European Union by Brexit, overnight turning Amsterdam into Europe’s biggest share trading centre and prompting calls for speedy reforms to keep Britain’s capital market globally competitive.
Now, with Liz Truss as Prime Minister, her new finance minister Kwasi Kwarteng wants a ‘Big Bang 2.0’, a reference to deregulating Britain’s stock market in the 1980s, with scrapping the bonus cap now on the table.
The cap, which was slipped into EU law at the last minute by the European Parliament, has hitherto been thought too politically sensitive to tamper with as Britain, home to most of Europe’s top paid bankers, faces a cost of living crisis.
Mindful of such criticisms, bankers have quietly lobbied to ease a levy on their balance sheets and a surcharge on their profits, a more difficult step for a cash-strapped government.
“The new government’s priority right now should be raising incomes for the lowest earners, not City fat cats,” said Fran Boait, executive director at Positive Money, which campaigns for a fair financial system.
The finance ministry had no immediate comment on the cap.
Introduced in 2014, the cap limits bonuses to twice basic pay with shareholder approval, and was in response to public anger after taxpayers bailed out banks, including Lloyds and Royal Bank of Scotland, during the 2007-09 financial crisis.
But the Bank of England (BoE) signalled backing for scrapping the cap on Thursday, saying it did not support the policy when it was introduced and that alternatives already in place were more effective in curbing excess risk-taking.
“The Senior Managers Regime and remuneration rules requiring deferral of bonus payments are more effective tools for ensuring bankers take proper account of risks,” a spokesperson for the BoE said.
Deferrals and clawbacks are part of globally agreed norms, and under the Britain’s senior managers regime, top bankers are ultimately directly accountable to regulators for their actions.
Scrapping the cap could prompt the EU to accelerate efforts to force euro financial business to move away from London.
“This should in the long run boost competitiveness for hiring in London versus Europe or the US, although it would be more of a minor positive than a key differentiator,” said Stephane Rambosson, CEO of Vici Advisory which specialises in hiring senior investment bankers.
It would take time for the changes to take effect, he said, because banks have regional or global compensation systems and it would be hard to quickly reverse high levels of fixed pay.
American investment banks like Goldman Sachs, Citi, JPMorgan and Morgan Stanley could be among the biggest beneficiaries, but a source at a large U.S. bank said scrapping the bank levy on balance sheets would make a much bigger difference.
Banks have increased fixed pay which would be difficult to reverse, while changing the tax structure can be done pretty much overnight, the source added. What is more, scrapping the cap does not help the industry’s public reputation because it brings back post-financial crisis images, the source said.
The European Banking Authority said last year that nearly a hundred highly paid bankers left Britain in 2019 ahead of its full departure from the EU at the end of 2020.
London still accounted for 71 per cent of the 4,963 top paid bankers in the EU who earned more than a million euros, including basic pay, bonuses, long-term awards and pension contributions.
Lobby group TheCityUK said that financial and related professional services contributed 261 billion pounds to Britain’s economy in 2021, while financial services delivered 75.6 billion in tax revenue in 2019/20, 10.1 per cent of the total.
Simon Morris, a partner at CMS law firm, said removing the bonus cap is a good idea.
“Abolition will send out a powerful signal that London is a free-market venue that rejects the old EU constraints. But one caveat - a bank should be freed to award unlimited bonuses only if it can demonstrate that it is adequately managing risk by other means,” Morris said.
Frances O’Grady, general secretary of the TUC, a labour union, said the government’s number one priority should be getting wages rising for everyone, not boosting bumper bonuses.
Tensions between London and Brussels over post-Brexit arrangements in Northern Ireland mean the EU has already put on hold a planned UK-EU regulatory forum.
Scrapping the bonus cap may harden attitudes in Brussels, such as accelerating efforts by the EU to force euro derivatives clearing in London to Frankfurt or making it harder for UK asset managers to run funds in the bloc.
The EU’s financial services chief Mairead McGuinness declined to comment.
But Markus Ferber, a member of the European Parliament, said the EU “should not engage in regulatory race to the bottom and would be well-advised to stick to its rules on the bonus cap”. — Reuters