Blog: Breakingviews – Bonus cap scrap would be dubious Brexit dividend – Reuters

A person points to the City of London financial district from a viewing platform in London, Britain, October 22, 2021. REUTERS/Hannah McKay

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LONDON, Sept 15 (Reuters Breakingviews) – UK finance minister Kwasi Kwarteng wants to make the City more competitive. One idea, according to the Financial Times, is scrapping an old European rule that restricts bonuses to 200% of fixed pay. It’s an odd place to start and may make more meaningful changes less likely.

Granted, there are strong arguments for repealing the cap, which came into force in 2014 and means that a banker earning 1 million pounds can earn a maximum 2 million pound bonus. The Bank of England in 2016 said that lenders simply increased base salaries to offset smaller bonuses, meaning overall compensation stayed the same. In other words, Barclays (BARC.L) and the UK operations of Goldman Sachs and JPMorgan simply ended up with higher fixed costs and less flexibility to claw back payments.

But it doesn’t follow that scrapping the rules would deliver a major boost. First, London-based advisers and traders will resist having their base salaries cut in favour of bigger bonuses, which effectively forces them to share more of the pain when markets are quiet and deals dry up. Europeans like BNP Paribas (BNPP.PA) and Deutsche Bank (DBKGn.DE) would still be subject to the bonus cap and would therefore be offering the comfort and security of higher fixed pay. That means UK banks and foreign ones operating in London might have to keep their compensation policies broadly the same to retain staff.

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Second, making an apparent concession on the politically controversial topic of banker bonuses risks a public backlash. Three-quarters of Brits supported the cap in 2014, according to YouGov, including about 70% of Conservative Party voters. Bringing the highly charged issue to the fore means Kwarteng might have less cover to push ahead with more meaningful changes, like getting rid of the bank levy. That annual charge on lenders’ liabilities will bring in about 1.3 billion pounds in the current tax year, according to the Office for Budget Responsibility, and comes on top of a separate 8% sector surcharge, which former finance minister Rishi Sunak proposed cutting to 3%.

The new government under Prime Minister Liz Truss favours a “more British style of regulation”, and is keen to boost the City by tearing up old European rules. But bank chief executives generally favour continuity, and balk at measures that would provoke a regulatory tit-for-tat with Brussels. Their policy wish list involves tax relief and getting rid of ringfencing rules – both of which have nothing to do with Europe. Britain’s post-Brexit Big Bang is shaping up to be more like a Big Flop.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

British finance minister Kwasi Kwarteng is seeking to scrap Britain’s cap on bankers’ bonuses, the Financial Times reported on Sept. 14.

Kwarteng argues the move would make London a more attractive destination for top global talent, the newspaper reported citing his colleagues.

Although no final decisions have been taken, people familiar with Kwarteng’s thinking said he wanted to scrap the cap, introduced by European Union legislation in 2014, as part of a package of City reforms, the report added.

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Editing by George Hay, Streisand Neto and Oliver Taslic

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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