The government is considering removing restrictions on bankers’ bonuses as part of its plan to ditch EU rules and to make the City more competitive.
The idea is at an early stage and not yet part of any public consultations, as officials fear scrapping the bonus cap could trigger a public backlash. But the move has support among some within the Treasury as a way to make London more attractive for senior bankers than Frankfurt, Paris or Dublin, boosting the capital’s prospects for retaining its key role in financial services.
Scrapping the cap would signal Britain’s willingness to take advantage of its newfound freedom and would be popular with many Conservative supporters and donors. Many Eurosceptics viewed the imposition of bonus restrictions as an unprecedented move to interfere with remuneration inside British companies.
With the world reeling from the financial crisis and multibillion-pound taxpayer-funded bailouts to save financial institutions, Brussels clamped down on bankers’ pay in 2014 by setting bonuses at a maximum of two times salary. The coalition government opposed the plan, with critics accusing EU politicians of trying to undermine the City, home to most of Europe’s highest-paid bankers.
George Osborne, the then chancellor, unsuccessfully challenged the cap in the European Court of Justice on the grounds it was “unlawful and misconceived”. His warning that the bonus restrictions would lead to “perverse incentives” for banks to raise employees’ base pay has turned out to be accurate, creating large fixed costs inside institutions whose revenues can see big swings, depending on the performance of markets in any given year.
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Rishi Sunak, the chancellor, unveiled a “roadmap” alongside his Mansion House speech last month to make the UK’s financial sector “the most trusted and competitive place to do business”. Measures range from green finance and fintech to looking at which rules transferred from Brussels could be cut or changed to better suit Britain. They include potentially rolling back the EU’s “Mifid” regulations, and Britain’s own ring-fencing rules separating retail and investment banking inside institutions.
Sunak dipped a toe into more controversial territory by confirming a review of the banks’ surcharge tax, an 8 per cent levy on their profits. Industry insiders also want the government to roll back the bank levy, which was introduced in 2011.
Officials and banking bosses are expected to turn their attention to the bonus cap after the current proposed reforms are enacted, as they do not want to stir opposition among the public. The Treasury may want backing from the Bank of England, which could make the argument that the cap hurts financial stability. The Bank’s governor, Andrew Bailey, has previously said it increased banks’ risk as it forced more capital into fixed payouts and removed managers’ flexibility. “The bonus cap is the wrong policy,” Bailey said in 2014.
Bailey and others have stressed they are not in favour of unfettered pay for City bankers, but for remuneration to be based on performance. If the Treasury and Bank do advance the idea of removing the cap, they would probably highlight the measures introduced to incentivise good behaviour, including compensation spread over many years.
One problem might be trying to get banks to lower salaries to put a higher portion of total pay at risk in potential bonus pots. Firms may say they can only make the change to contracts coming up for renewal or new hires.
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A Treasury spokeswoman said: “The chancellor has set out his vision for an open, dynamic and competitive financial services sector, and earlier this month we published a roadmap to achieve this by deepening our global relationships, harnessing technology and enhancing our regulatory regime.”
