City minister Andrew Griffith said today that scrapping the bankers’ bonus cap would realign Britain with global financial norms, as he faced questions from MPs in parliament about the government’s so-called Edinburgh Reforms.
Discussing bankers’ bonuses, Griffith said “we have departed from global norms… the global competitive set do not have this (bonus cap).”
London, Griffith said, was hit even harder by the cap on bonuses than the rest of Europe because more international banks have bases in London.
The bonus cap was introduced by the EU after the financial crisis, coming into force in 2014. Critics of the cap say it has actually increased bankers’ total pay, as banks simply increased basic pay to attract talent.
Griffith said there was little risk that scrapping the cap would lead to big bonuses on top of already elevated pay.
“Because there is a global market here, it is the global market that will ultimately set compensation. We probably don’t take too much of a risk… of going back to high fixed pay and then a bonus on top of that,” Griffith said.
The lifting on the cap forms part of the wider Edinburgh Reforms – a package of over 30 reforms designed to free-up the UK’s financial services sector and boost growth – that were announced in early December. Griffith said that turning these announcements into policies, which he said would benefit the wider economy, was “top of our to do list”.
The government trailed the reforms as a part of capitalising on Brexit freedoms. The UK would not have been able to lift the cap on bonuses if it were still in the UK.
However, Chair of the Treasury Committee, Harriet Baldwin, pointed out that a majority of the Edinburgh Reforms were unrelated to the UK’s prior membership of the EU.
“We estimate that about eighteen of them (reforms) have absolutely nothing to do with the UK leaving the European Union. About twelve of them are linked to changes we can now make”, Baldwin said.
“I think that’s about right”, Griffith replied.
One of the other reforms discussed in the committee was ring-fencing. Ring-fencing separates retail banking from riskier forms of banking. It was introduced in the wake of the 2008 financial crisis to insulate retail banking from shocks originating elsewhere.
Griffith reassured MPs that the proposed changes to ring-fencing don’t “dismantle or dismember” the objectives of the original regime.
He said the government had taken a “cautious approach” going forward, which would take into account “the changes in the financial system since 2008”, but added that there would be “no race to the bottom and no bonfire of controls”.
When pressed on why the government proposed increasing the threshold at which ring-fencing applied from £25bn to £35bn, one of the largest changes to the existing regime, Griffith said it was to avoid the “equivalent of fiscal drag for banks”, as asset values have continued to rise.