Should caps on bankers’ bonuses be scrapped?

The Treasury is considering removing the cap on bankers’ bonuses as a symbol of the new chancellor’s “Big Bang 2.0” approach to City regulations after Brexit.

Sources close to Kwasi Kwarteng told the FT that he wanted to scrap the cap, which was introduced by EU legislation in 2014, “to boost the City of London’s global competitiveness”.

Bosses in the City have long complained about the EU-wide bonus rules, which cap bonuses at twice an employee’s salary, but removing the restrictions could prove deeply controversial during the cost-of-living crisis.

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‘Incentives and attractions’

When the cap was introduced, “banks weren’t happy”, wrote The New Statesman’s Emma Haslett. “Their argument was that they would drive the best finance-sector workers to the US, where big bonuses were still allowed, or that lenders would simply adjust pay to compensate,” she said.

Haslett also noted that Roger Barker, of the Institute of Directors, argued that bonuses are “easier to ‘claw back’ than salaries” because a bank that “pays a high salary and a small bonus has less space to punish an employee who, for example, loses $6.2bn on a series of risky bets on credit default swaps”.

It’s true that the cap was “always opposed by the UK on the grounds that it would damage London’s standing as a global financial hub”, said Sky News.

Scrapping the cap “could also be defended on the basis that Paris is offering an incentive – a 30% income tax rate – to attract investment banking professionals to the French capital”, it added.

‘Banks are bluffing’

However, writing for Left Foot Forward, Luke Hildyard said that banks are “bluffing” when they claim that the cap “prevents them from attracting and retaining high performing staff”. In fact, he argued, “there’s no shortage of people wanting to be senior bankers”.

There is also the argument that “uncapped bonuses lead to the kind of excessive risk taking that spawned the financial crisis of 2008”, said the BBC.

Then there is the question of timing. The FT recalled that when the idea was suggested in June, Labour leader Keir Starmer described the approach as “pay rises for bankers, pay cuts for district nurses”.

Lifting the cap could prove “widely controversial” at a time when households “are struggling to make ends meet amid the cost of living crisis”, said The Guardian.

“The government has already courted controversy by refusing to bring in a fresh windfall tax on the excess profits being enjoyed by energy firms as a result of the war in Ukraine,” noted HuffPost.

Therefore, a source at the Treasury told the FT, “it’s going to be publicly difficult to sell during a time of austerity”.