Lifting the cap on bankers’ bonuses will boost investment and grow the economy, the Chancellor has argued, as he defended the decision against warnings it would cause risky financial decision-making.
Kwasi Kwarteng was heckled by opposition MPs as he confirmed reported plans to lift the cap on bankers’ bonuses as part of post-Brexit deregulation measures.
Critics have said the EU-wide rules, which cap bonuses at twice an employee’s salary, push up base pay and mean the UK has not been an attractive base for banks to be based.
However those warning against the move said the cap – implemented in 2014 – was brought in to deter bankers from making the kind of risky financial decisions that led to the 2008 crash.
The Government argued that allowing bonuses to be unlimited aligns the incentives of bankers with those of their employer which, it said, supports economic growth.
But Michael Barnett, a partner at Quillon Law and who worked on cases during the 2008 financial crisis, said the decision was reminiscent of the economic environment that lead to the crash in the first place.
“Bankers’ bonuses were seen as emblematic of an imploding financial services industry that was fuelled by a culture based on greed and pursuit of profit at any cost,” he said.
“Bonuses and other financial incentives formed a major component of many claims that were brought in the courts, whether successful or otherwise.”
Financial services giant PwC said scrapping the cap would offer “greater flexibility for UK banks” offering the “the potential to reduce fixed costs […] which arguably could drive competitive benefit to the UK”.
And Ryan Shorthouse, chief executive of centre-right think-tank Bright Blue, argued the announcement was a political decision to show the new Chancellor wanted to “send dramatic signals” that the Government “changing course and going for growth”.
“The most controversial policies – cutting the additional rate of tax, corporation tax and the cap on bankers’ bonuses – are unlikely to have substantial economic effects, but they are politically potent: reinventing the Tory brand, winding up the Left and showing this Government unashamedly means business,” he said.
But the move was criticised by charities who argued that bankers would see their pay soar just as households were struggling to make ends meet, dividing the rich and the poor further.
Becca Lyon, head of child poverty at Save the Children, said: “The Chancellor has prioritised bankers’ bonuses over helping vulnerable children through the cost of living crisis, whose hard-working parents face impossible choices.”
Labour’s Shadow Chancellor Rachel Reeves said the Chancellor had “made it clear what his priorities are. Not a plan for growth, a plan to reward the already wealthy.”
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. All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe.
“It never capped total remuneration, so let’s not sit here and pretend otherwise. So we’re going to get rid of it.”
He added: “And to reaffirm the UK’s status as the world’s financial services centre, I will set out an ambitious package of regulatory reforms later in the autumn.”