The UK's new chancellor has dived head first into one of the most contentious political issues in UK finance.
Kwasi Kwarteng has chosen scrapping the cap on banker bonuses as one of his first proposals to sharpen London's competitive edge against Paris and Frankfurt, according to people familiar with the matter. It comes after years of bankers seeing little government action to improve the industry's fortunes in the wake of the financial crisis and Brexit negotiations.
It is unclear how much difference such a change would make, given banks have already raised fixed pay and use workarounds such as allowances to skirt the cap, which limits bonuses to twice the salary of staff defined as "material risk takers". Still, scrapping the limit that was set by the European Union in 2014 could help send a clear message from the new government to the world of finance: We are here to help.
"It is a welcome move aimed at enhancing the competitiveness of the City of London versus other global centres like New York," said Gerard Lyons, chief economic strategist at online wealth manager Netwealth and supporter of Prime Minister Liz Truss. "It is another indicator of a significant shift away from benign neglect of the City and financial services."
The Treasury has made no official announcement on the idea, and political response has been muted during a period of mourning following the death of Queen Elizabeth II. In June, an attempt by Boris Johnson's government to broach the issue of banker pay led to fierce criticism from the opposition Labour Party, as British households face the steepest rise in living costs for 4 decades.
"Removing the cap would be a pro-rich ideological measure that sends a depressing message about who policymakers listen to and think about when making economic policy," said Luke Hildyard, executive director of the High Pay Centre, a think tank focused on economic inequality.
After 8 years of dealing with the rules, banks have found ways to align pay with that of other regions. That means the bonus cap has not been a top lobbying priority for many firms and removing it is unlikely to lead to any significant pay changes, said executives at multiple global banks.
Still, the end of the cap would still be a welcome break from the crisis management that followed the global financial crisis, some said. Others pointed to alternative ways to enhance London's prospects, such as reducing taxes on bank earnings. A surcharge on profit was introduced in 2015, which the former chancellor Rishi Sunak had planned to scale back from next year to offset an overall rise in corporation tax - an increase that Truss' administration now plans to cancel.
Banks pay £18.7 billion (S$30.3 billion) in annual taxes, according to an analysis last year by PricewaterhouseCoopers (PwC) for UK Finance, an industry lobby group. Including national insurance and other levies on employees, the sector accounts for £37.1 billion, or 5.5 per cent of the government's total receipts.
"Ensuring the industry is globally competitive is essential for future economic growth, and we are keen to see the steps the government plans on taking to make the UK an attractive place to do business," UK Finance said on Thursday (Sep 15).
The PwC research estimated that a bank in London would have an overall tax burden of 44.9 per cent last year, compared to an equivalent 45.7 per cent in Amsterdam and 44.9 per cent in Frankfurt. By 2024, London would be at 50.5 per cent, Amsterdam 37.5 per cent and Frankfurt 38.6 per cent, PwC projected. Its estimate was calculated before the new government's plans to reduce national insurance and scrap a corporation tax rise, which would lower the rate in London.
While global firms have had to tweak the mix of remuneration to comply with the cap, it has not led to pay cuts. At the UK's 5 largest banks, fixed pay as a percentage of total remuneration rose to 54 per cent from 28 per cent between 2013 and 2014 as firms adjusted to the rules, a Treasury official said in parliament.
JPMorgan Chase is one example of how pay packages have been adapted. President Daniel Pinto was awarded US$28.5 million for 2021, when he was based in the UK. That made him the highest paid of Jamie Dimon's top deputies, and while other senior executives got cash bonuses, he instead received a US$8.4 million fixed allowance. Still, he faced a 7-year wait for his stock bonuses to fully vest, while his US colleagues received their awards after 3 to 5 years.
British banks have topped up the pay of senior executives with fixed awards, often given in a mixture of cash and shares. HSBC Holdings chief executive officer Noel Quinn received a base salary of £1.29 million last year, but also earned £1.7 million in a fixed pay allowance. Similarly, Lloyds Banking Group CEO Charlie Nunn was paid a base salary of £426,000 after starting as the lender's boss in August 2021, topped up with a £402,000 in a fixed share award that was released over 3 years.
Even so, lifting the limit could help banks in the UK compete globally for staff, said Jordan Galhardo-Burnett, head of publications and insight at BCG Expand. "Banks have lost huge numbers of talent to hedge funds, fintechs and digital asset firms, which are not as heavily scrutinised so they are able to sometimes able to be more generous," he said, though he added that it may prove too contentious for some. "There could be plenty of firms out there that might keep things consistent with how they've done things previously and not have any disruptive PR."
Senior bankers are jointly regulated by the Bank of England, where governor Andrew Bailey has long thought that the pay rules should be overhauled. "The Bank did not support the bonus cap when it was introduced," a spokesperson said. "The Senior Managers Regime and remuneration rules requiring deferral of bonus payments are more effective tools for ensuring bankers take proper account of risks."
Less than a month into the new government, it is unclear what form any changes will take. Earlier discussions of loosening any banking regulation have met with political backlash.
"Gifting bankers uncapped bonuses at a time when millions of households are choosing between eating and heating is beyond tone deaf - it's shameful," said Fran Boait, executive director at Positive Money, a campaign group. Bloomberg