After Rachel Reeves finished her speech to Labour’s annual business conference yesterday, she took questions from the press and was asked – twice – about her decision to, as the BBC put it, “U-turn” on capping bankers’ bonuses. This was unfair and inaccurate.
Reeves is not the person who decided to remove the (already generous) cap on how much the “material risk-takers” at financial institutions can be paid as a bonus. The policy reversal was proposed by Kwasi Kwarteng in his brief but eventful tenure as chancellor, and enacted by Rishi Sunak and Jeremy Hunt. All Reeves did was tweet that removing the cap was a weird priority to have, amid a cost-of-living crisis. To be fair to the Tories, they never wanted the cap in the first place (it was imposed by the EU in 2014, and George Osborne considered fighting it in court), so all that has happened is that the government has now done something it wanted to do ten years ago.
Removing the cap doesn’t make a huge difference to the economy. I’m told the Treasury has done modelling (which hasn’t been made public) showing a small benefit to the economy from doing so, but the cultural change it represents could be more important.
Before Reeves’s speech, I attended a meeting in which members of the financial services industry discussed economic policy with the MP who hopes to be their next City minister, Tulip Siddiq. The bonus issue wasn’t raised, but the financial services industry made it clear that a more “risk on” culture in the UK is needed.
Institutional investors are concerned by the low level of retirement savings in the UK. The median American aged 55+ has retirement savings worth 60 per cent more than the median Brit of the same age, and this helps to make US capital markets very powerful – so powerful that people from many other countries, including ours, invest their savings in American companies. Your pension may well be doing that right now. This is why we see companies headquartered in the UK listing in US markets: there’s just a lot more money on offer.
UK-listed companies are underpriced in comparison, and find it harder to raise the capital they need to grow. Many see this as the fault of an overly cautious regulatory regime. Bonuses are one relatively small part of this, but it seems reasonable to argue that tying risk-takers’ pay more closely to performance – as happens in the US – could have a positive effect.
On stage, Reeves agreed that “a market economy thrives on risk, on daring, on leaps into the unknown”, and that “Paris and Frankfurt are breathing down our neck” in the financial services sector, which currently accounts for £95bn of our exports.
It’s also worth noting that capping bankers’ bonuses doesn’t affect how much they get paid, just how they receive it. There are plenty of other ways to be grossly remunerated, some of which involve paying less tax. The cap is also unnecessary, because other policies (the Senior Managers and Certification Regime) are in place to hold bankers accountable for the kind of reckless gambling that led to the 2008 crash.
That’s not to say you can’t scream into a cushion, or grab the nearest apple and just squeeze it until it explodes into wet chunks in your fist, at the thought of how much more bankers get paid than the rest of us. But mature policymaking involves recognising that a thing people find annoying – see also estate agents, perhaps even journalists – can also have its uses.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here.
[See also: Labour must learn the right lessons from Bidenomics]
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