Britain to scrap banker bonus cap to 'deregulate' the City

BRITAIN will accelerate moves to bolster the City of London’s competitiveness as a global financial centre by scrapping its cap on banker bonuses ahead of an “ambitious deregulatory” package later in the year, finance minister Kwasi Kwarteng said on Friday (Sep 23).

The cap limits bonuses to twice a banker’s basic salary, with shareholder approval, and was introduced in the European Union to curb excessive risk taking after taxpayers had to bail out lenders in the global financial crisis.

The move was already flagged, triggering anger as Britain faces a cost of living crisis, forcing the government to spend billions to help households pay their energy bills.

Britain and the Bank of England have always opposed the cap, introduced in 2014, saying it simply bumps up basic pay.

“We need global banks to create jobs here, invest here and pay taxes here in London, not in Paris, not in Frankfurt and not in New York,” Kwarteng told Parliament.

“All the bonus cap did was to push up the basic salary to bankers or drive activity outside Europe, it never capped total remunerations... As a consequence of this ... we are going to get rid of it.”

Banks and finance recruiters have said scrapping the bonus cap would likely take time to have an effect - as many bankers had their fixed pay lifted in recent years to make up for constrained bonuses. The banking industry had been prioritising other demands to boost competitiveness, including scrapping government levies on bank profits.

A source at a major US bank, who declined to be identified, said scrapping the bonus cap had not been a priority for investment banks, but said steps to improve London’s competitiveness were welcome.

“To many who were scarred by the consequences of the 2008 global financial crisis and the banking scandals that accompanied it, news that caps on bankers’ bonuses may be abolished will trigger a response bordering on visceral,” said Michael Barnett, a partner at Quillon Law.

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“Reintroducing what is perceived as one of the more insidious elements of a culture that no-one wants to see return carries risks that incentivising the sale of financial products will always bring.”

UK Finance, which represents banks, said: “Further tax changes and ambitious regulatory reform are required to capitalise on this bold first move.”

The CityUK, which promotes UK financial services abroad, said Britain must make a competitive and compelling offer to lift growth, but there is no magic bullet.

Lawmaker John Glen told Kwarteng there was logic behind scrapping the bonus cap, but the biggest concern banks had while he was City minister was the overall tax burden and “I would urge him to keep a focus on the global competitiveness of that”.

The City is largely locked out of the EU since Brexit and financial services were excluded from the UK’s trade deal with the bloc.

Britain has already set out a draft law before Parliament to make its capital market and system of financial rulemaking more efficient as the City faces added competition from Amsterdam, Paris and Frankfurt.

Britain’s new Prime Minister Liz Truss has signalled she wants to go further to “unshackle” the City from remaining rules inherited from the EU.

Kwarteng said the financial services sector will be at the heart of the government’s programme to drive growth in the economy.

“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,” Kwarteng said.

The finance ministry said in documents accompanying Kwarteng’s speech that the “deregulatory” package will unleash the potential of the sector.

“This will include the government plan for repealing EU law for financial services and replacing it with rules tailor made for the UK, and scrapping EU rules from Solvency II to free up billions of pounds for investment,” the ministry said.

The BoE has already proposed easing Solvency II, a set of capital requirements for insurers inherited from the EU, but insurers want more capital released. REUTERS