Lifting the cap on bankers’ bonuses will boost investment and grow the economy, the Chancellor argued, while defending the decision against warnings it would lead to risky financial decision-making.
Kwasi Kwarteng was heckled by opposition MPs as he confirmed announced plans to lift the cap on bankers’ bonuses as part of post-Brexit deregulation measures.
Critics said EU-wide rules, which cap bonuses at twice an employee’s salary, raise base pay and mean the UK has not been an attractive base for banks.
However, those who warned against the move said the cap – put in place in 2014 – was introduced to deter bankers from making the kind of risky financial decisions that led to the 2008 crash.
The government has argued that allowing bonuses to be unlimited aligns bankers’ incentives with those of their employer which it says supports economic growth.
But Michael Barnett, a partner at Quillon Law who worked on cases during the 2008 financial crisis, said the decision was reminiscent of the economic environment that led to the crash in the first place.
“Bankers’ bonuses were seen as emblematic of an imploding financial services industry fueled by a culture based on greed and the pursuit of profit at all costs,” he said.
“Bounties and other financial incentives have been a major component of many claims that have been brought to court, whether successful or not.”
Financial services giant PwC said removing the cap would provide “greater flexibility for UK banks” offering “the opportunity to reduce fixed costs”. […] which could arguably bring a competitive advantage to the UK”.
And Ryan Shorthouse, chief executive of centre-right think tank Bright Blue, argued the announcement was a political move to show the new chancellor wanted to “send dramatic signals” that the government was “changing course and opted for growth”.
“The most controversial policies – the reduction of the additional tax rate, the corporate tax and the capping of bankers’ bonuses – are unlikely to have substantial economic effects, but they are politically powerful: reinventing the brand Tory, liquidating the left and showing this government means shameless business,” he said.
But the move was criticized by charities who argued bankers would see their pay skyrocket just as households struggled to make ends meet, further dividing rich and poor.
Becca Lyon, head of child poverty at Save the Children, said: “The Chancellor has prioritized bankers’ bonuses over helping vulnerable children through the cost of living crisis, including hard-working parents are faced with impossible choices.”
Labour’s shadow chancellor Rachel Reeves said the chancellor had “clarified what his priorities were. Not a growth plan, a plan to reward the already rich.
The Chancellor said: “We need global banks to create jobs here, invest in London and pay taxes in London, not Paris, not Frankfurt, not New York. The bonus cap has only increased bankers’ base salaries or stimulated business outside of Europe.
“He never capped total compensation, so let’s not sit here and pretend otherwise. Then we’ll get rid of it.”
He added: “And to reaffirm the UK’s status as a global financial services centre, I will introduce an ambitious set of regulatory reforms later in the autumn.”