Pressure is building on Kwasi Kwarteng tonight to scrap the cap on bankers’ bonuses, as the Bank of England said it never wanted the EU pay restriction.
One minister also told City A.M. that scrapping the cap “makes it more attractive to be in London”, with the measure likely to get support among large sections of the Tory party.
The Financial Times reported on Wednesday night that the chancellor was drawing up plans to scrap the measure to try and bank a post-Brexit win for the City.
The cap, which was introduced by Brussels after the 2008 financial crash, sees bankers’ bonuses limited to no more than 100 per cent of their fixed pay or double that with explicit shareholder approval.
Removing the cap, it is argued, could strengthen London’s competitiveness in the global finance industry by allowing City banks to lure the sector’s best talent by offering better remuneration.
It would also cut banks’ fixed costs as they could dish out bonuses instead of increased wages.
A Bank of England spokesperson yesterday said they “did not support the bonus cap when it was introduced”.
“The Senior Managers Regime and remuneration rules requiring deferral of bonus payments are more effective tools for ensuring bankers take proper account of risks,” they said.
Veteran City commentator David Buik said that removing, or easing, the cap was “logical”.
“This move will stimulate activity in trading markets and in IPO and M&A activity, thus encouraging more banks to focus business on London, thus delivering more taxation to the revenue,” he said.
Pundits have already said that following through with the change would be difficult politically for the government, particularly as the country faces stagflation.
Critics also say it may trigger a return of the high risk behaviour that sparked the global financial crisis.
One Tory MP said it “shouldn’t be a priority”.
“It’s politically odd at this time – it’s only meaningful to a few thousand bankers and risks pissing off the EU when there’s no need to,” they said.
A minister said: “There’s never going to be a good time to do it, but if you can justify it by saying ‘it will increase overall economic growth’ then we should look at it.”
Prime Minister Liz Truss has promised to guide economic policy in a much more free market direction, while also vowing to immediately ditch EU regulation for the City.
She is set to implement radical supply side reforms and embrace a less interventionist style of governing, after Boris Johnson’s big state approach.
A senior London Conservative MP said “it fits entirely with what we expect people to see a lot more of under Liz [Truss] – that we are not here to intervene in the private sector that way”.
“You might say the optics are bad, but if the philosophy is that ‘it’s not up to us to tell banks how to pay their people’, then it makes complete sense,” they said.