Bankers’ bonuses: to cap or not to cap?
Bankers’ bonuses have been hotly debated in recent weeks as former-Chancellor Kwasi Kwarteng’s plan to remove the cap on them has been approved. This follows a four-month consultation period with regulators. However, this is not the first attempt to remove the cap as Liz Truss tried previously back in 2022.
The cap on bankers’ bonuses was only introduced in 2014. The decision was taken in the wake of the 2008 financial crisis with the intention of minimising risk-taking due to there being less riding on individual performance. The financial crisis was a global phenomenon but in the UK it saw RBS, Lloyds and HBOS being rescued with taxpayers’ money. This was an era characterised by high unemployment, austerity, and insecurity. The European Union first imposed the cap which is now being removed by the post-Brexit UK government. During its enforcement, the cap limited bonuses to double bankers’ basic salaries.
During its enforcement the cap limited bonuses to double bankers’ basic salaries.
The Conservative government has been seeking the removal of the cap to boost investment in the City and scrap EU rule post-Brexit. Kwasi Kwarteng maintains that the removal of the cap will make London a more attractive place to do business.
Since its conception, the plan has been marred in controversy. While city bosses have long complained about the cap, wider opinion has been more divided. City bosses have criticised the cap arguing that banks compensating bonuses with a higher base pay has pushed up banks’ fixed costs. Their concern with this is that as these costs cannot be adjusted in line with their financial performance, the UK is perceived as a less appealing option than the US or Asia.
Nonetheless, it is precisely because of these increased basic salaries that some Bankers have preferred having the cap, feeling adequately compensated. That being said, this could suggest that the cap was largely ineffective anyway which was the stance taken by current Chancellor, Jeremy Hunt, in his defence of the decision. Furthermore, Mr Hunt argued more tax could be taken from rich bankers following the cap’s removal.
The Conservative government has been seeking the removal of the cap to boost investment in the City and scrap EU rule post-Brexit
Staunch criticism has been launched at the Government following the decision, accusing them of fostering a ‘greed is good’ mentality that risks seeing banks engaging in risk-taking behaviour. With the 2008 financial crisis being the most severe worldwide financial crisis since the Great Depression, there are fears of history repeating itself should the government and banks alike, blinded by hubris, fail to learn their lessons. Although, those defending the cap’s removal claim that with the existence of new rules and the ability of regulators to defer bonuses or rescind them later, risk-taking will be effectively deterred.
Another factor making the decision divisive is the social context of the current cost of living crisis. The Trade Union Congress has hit out at the decision, labelling it ‘obscene’ and ‘an insult to working people.’
Some have criticised the very existence of this debate, stating that far too much attention from Parliament is given to the City, with their use of lobbyists and contributions to party funding giving them undue influence in Westminster.
Once again, the controversy of the cap’s removal can be seen to be tied up in the government’s neglect of the working population at a time when people are struggling to make ends meet, with the decision coming the same week nearly 4 milion were reported to be living in destitution across the UK. At any rate, it seems UK politicians won’t be beating the accusations of elitism any time soon.
Image: GLMarshy via Wikimedia Commons
