London The alleged plan of the new British finance minister, Kwasi Kwarteng, to abolish the bonus cap for bankers in the City of London, has reignited the dispute over “fair” and at the same time economically efficient remuneration in the financial sector. While American investment banks in particular unofficially welcomed the project and were supported by the Bank of England, trade unions and the opposition Labor Party criticized the plans as redistribution in favor of higher earners.
According to reports in the British media, Kwarteng wants to lift the upper limit for bank bonuses introduced by the EU after the 2008 financial crisis. According to the EU rule that has been in force since 2014, bonuses in cash and shares may not be higher than twice the annual salary. Brussels wants to limit excessive risks and strengthen financial stability.
The British Treasury did not want to confirm the plans for abolition. The Chancellor of the Exchequer will present an emergency budget for the fight against the energy crisis next Friday and could also address the bonus debate. Great Britain’s new Prime Minister Liz Truss recently defended the disproportionate tax relief for higher earners, arguing that they also paid more taxes.
Truss and Kwarteng have announced plans to boost Britain’s chronically weak economic growth. The British economy stagnated in the second quarter of the current year. From the abolition of the bonus rules from the time of EU membership, Kwarteng apparently expects a “Big Bang 2.0”, which should strengthen the competitiveness of the London financial center and thus unleash new growth forces.
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Former British Prime Minister Margaret Thatcher launched a similar wave of deregulation in 1986. At the same time, the new finance minister allegedly wants his plan to thwart efforts by the EU to lure more bankers from the City of London to European financial centers in Frankfurt, Paris or Amsterdam.
It is disputed among economists whether abolishing the bonus cap would have the desired effect. “It’s a pretty confusing signal when people are being crushed by the sharp rise in the cost of living and the government is encouraging wage restraint,” said former British central banker Andrew Sentance, “the timing would be very bad.” Opposition leader Keir Starmer accused Kwarteng of ” raises for bankers and cuts for nurses”.
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The reaction in the city was completely different. “It’s a welcome move that aims to improve the City of London’s competitiveness against other global centers like New York,” Gerard Lyons, chief economic strategist at online wealth manager Netwealth, told Bloomberg.
Competing financial centers expect further deregulation in London. “Frustration about the consequences of Brexit and the loss of importance in politics runs deep in the city. In addition, the negative effects are far from over. “Removing the bonus cap would be a fast-acting therapeutic measure that should initiate the start of further measures,” says Hubertus Väth, Managing Director of Frankfurt Main Finance.
The Bank of England also got involved in the heated political debate at an unusually early stage: “The bank did not support the bonus cap when it was introduced. The regulation for senior executives and the remuneration rules, which require the deferral of bonus payments, are more effective tools to ensure that bankers take appropriate account of the risks,” said a spokesman for the central bank.
Andrew Bailey, Governor of the Bank of England, had also been critical of the bonus cap in the past, but warned the new government not to jeopardize financial stability with a wave of deregulation in the City.
European banks in London in a bind
The bonus cap is also controversial because many major British banks have now found ways to circumvent it. For example, HSBC and Lloyds simply increased their managers’ fixed salary components. The US bank JP Morgan also boosted the salary of its London-based President Daniel Pinto last year with a lump sum payment of 8.4 million dollars. If the bonus cap in the City of London were to be dropped, the US banks could save themselves these detours and standardize the salary structure for their bankers again.
EU banks such as BNP Paribas or Deutsche Bank could find themselves in a quandary if the bonus cap were abolished in London: they would continue to be subject to the bonus cap and would have to pay their bankers higher fixed salaries to keep them on track.
More: Liz Truss and Rishi Sunak plan the “Big Bang 2.0” for London’s financial industry