Inflation is high enough that the governor of the Bank of England has implored people to “exercise restraint” when requesting pay rises, but it appears that Downing Street doesn’t see all wage inflation as a bad thing. According to the i newspaper Steve Barclay, the Prime Minister’s chief of staff, has written to Rishi Sunak, the Chancellor, to propose “deregulatory measures” that would “reduce the overall burden on business”, for example by lifting the cap on bankers’ bonuses. In Prime Minister’s Questions on Wednesday, Keir Starmer accused Boris Johnson of providing “pay rises for City bankers, pay cuts for district nurses”.
Even by the government’s standards, this seems like bonkers timing. The current cap on bankers’ bonuses was introduced by the EU in 2014 and requires them to pass a shareholder vote if the bonus is more than the employee’s salary. There’s also a hard limit on bonuses of no more than double salary. The law recognised that the 2008 financial crisis had been caused, in part, by a generation of bankers whose increasingly large bonuses had given them an incentive to take the kinds of risks that cause a meltdown in the global banking sector. To allow such bonuses again on the brink of another global economic crisis looks like adding more risk when there is already more than enough risk to go around.
When the rules were introduced, banks weren’t happy. Their argument was that they would drive the best finance-sector workers to the US, where big bonuses were still allowed, or that lenders would simply adjust pay to compensate.
Since the rules came into force, however, things have ticked along quietly. There’s some evidence that bankers’ salaries did, indeed, rise after the cap was introduced, but in 2016 the Brexit vote gave the financial sector other things to worry about, and while the government has been asked periodically whether it will consider ditching the cap, the response has always been the same: “It’s not a priority.”
There have been some signs of readiness to make such a move, however. Last year the Financial Times reported that Boris Johnson had been lobbied by international bankers to ditch the cap. But one finance insider told me there was no appetite among British lenders to scrap it. British bankers are hardly suffering at the moment; in February the Guardian reported that one City bar had a “run on champagne” because the bankers at the UK’s big four lenders – HSBC, Barclays, Lloyds and NatWest – were anticipating a £4bn bonus round this year.
Is there anything positive about this trend? Roger Barker, director of policy and corporate governance at the Institute of Directors, points out that bonuses are easier to “claw back” than salaries. A bank that pays a high salary and a small bonus has less space to punish an employee who, for example, loses $6.2bn on a series of risky bets on credit default swaps.
Bankers’ pay can also affect how popular a financial centre is. If we look at initial public offerings (IPOs), in which companies’ shares are launched onto public markets, figures from EY show that in London, the amount raised through IPOs fell 51 per cent between the first quarter of 2021 and the first quarter of 2022, against a 37 per cent drop for the rest of the world. “There has been a loss of a certain amount of business in the City of London, post-Brexit, partly because there isn’t much of a case to make for doing EU-related business and transactions in London, and so trading in European shares, for example, has been shifted to Amsterdam and other places,” says Barker. “So there’s no doubt that London has lost a certain amount of business, in an entirely predictable way.”
As a former Brexit secretary, Barclay may well be looking for a way to counter this trend, and one way to boost the City’s popularity might be to scrap the bonus cap, giving it an advantage over its EU cousins by attracting leading bankers, thus potentially encouraging banks to bring their IPOs back. The problem for the government is that it should have done this some time ago, before the trading went elsewhere and especially before financial markets began to teeter in the face of tightening monetary policy. Doing it now would mean taking the heat for the decision without getting any of its benefits. Does that mean it won’t happen? Don’t bank on it.