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The Chancellor is trying to keep talent in a financial sector that is losing ground to the EU.
By Emma Haslett
Of all the things the government could be doing to improve the economy right now, scrapping the cap on bankers’ bonuses seems like the most brazenly tone-deaf. Kwasi Kwarteng, the Chancellor, is said to be planning to do just that, abandoning the regulation that limits bonus payments to 100 per cent of bankers’ salaries, or 200 per cent if shareholders vote for it.
The rules on bonuses were introduced by the European Union in the wake of the 2008 financial crisis, when it was found that shameless risk-taking by bankers whose astronomical bonuses depended on similarly astronomical returns had led to a situation in which some of the continent’s largest lenders (including, in this country, Royal Bank of Scotland and Lloyds Bank) required government bailouts to the tune of billions of dollars.
At the time the rules were announced in 2014, European banks grumbled that to compete with their Asian and American rivals, they would have to increase salaries to make up for the lost bonuses. And many did: a report by the European Banking Authority in 2016 found that the number of high earners increased by 21.6 per cent between 2013 and 2014.
Since then, however, we haven’t heard much about it – indeed, a financial sector insider I spoke to in June, when scrapping the bonus cap was first suggested, suggested it was a non-issue for banks. “It isn’t a priority,” he said. And the cap has been shown to work: a lab experiment by the Bank of England in 2020 found people were less likely to take risks when their reward was capped at a certain level.
So why is the government even suggesting this? During a cost-of-living crisis in which most people in the UK are facing their toughest winter in years, blithely increasing the wealth of a group of people who are, to put it lightly, deeply unpopular with voters seems like political suicide. Even Boris Johnson, who was supportive of the idea of removing the cap, is said to have been put off by criticisms.
The awkward truth is that Brexit – which Kwarteng supported and worked on as a minister in the Department for Exiting the EU – has been disastrous for the UK’s financial sector. A study published last year indicated that 440 financial firms had moved a combined £1 trillion in assets to alternative finance centres in Dublin, Paris, Luxembourg, Frankfurt and Amsterdam, shifting 7,400 jobs in the process. New Financial, the capital markets think tank that conducted the study, said it expected this trend to continue. “We are only at the end of the beginning of Brexit,” it said.
If you don’t like those figures, look at the number of companies choosing to list on the London Stock Exchange: data published by Bloomberg in June showed that since the Brexit vote in 2016, the amount London is making from initial public offerings has fallen from 40 per cent of the European total to 30 per cent. No wonder the government is panicking.
Kwarteng’s plan looks like loss-chasing: the phenomenon whereby a gambler places ever-riskier bets to recoup the money he or she has lost during their session. Heading into the aforementioned cost-of-living crisis, the government should be looking to avoid measures that could lead to a repeat of 2008, not encourage them. Now – with the City weakened by Brexit and the government preparing to borrow unknown quantities to essentially bail out energy customers – is not the time to be injecting even more risk into our financial system.
[See also: Behind the Bradley Stoke Tesco self-service “boycott”]