Among all the headline-grabbing tax cuts and growth initiatives in Kwasi Kwarteng’s so-called mini-Budget was one small, but powerfully symbolic, deregulation for the City of London.
The new chancellor, heartily applauded by prime minister Liz Truss as he delivered his debut policy package to the House of Commons, confirmed a well-trailed plan to ditch the bankers’ bonus cap — the EU rule introduced in 2014 that limits bonuses to double a banker’s salary.
Cue loud heckles from Labour MPs and across social media. The prospect of higher pay for bankers — reinforced by the axing of the 45 per cent tax band — will certainly grate with many voters as they struggle with a cost of living crisis. The idea of handouts for wealthy bankers would be widely alienating at the best of times — and this isn’t the best of times: average pay in the UK is shrinking at close to 3 per cent in real terms, according to the Office for National Statistics.
The Truss government may not worry about a tin-eared policy provoking a backlash among left-leaning sections of society, but there is real risk that this kind of nose-thumbing could lose Red Wall Tory MPs all-important votes.
Kwarteng did nothing to soften the message. Quite the reverse: he juxtaposed announcement of the move with promises to cut benefits for those who don’t try hard enough to find work, and to curtail strike rights for disaffected workers.
The irony, for bankers, is that in return for becoming the nation’s bogeymen once again, they are more likely to lose than to gain.
Kwarteng’s argument — that scrapping the cap would encourage banks to “invest here and pay taxes, here in London”, rather than in other finance hubs such as Paris, Frankfurt or New York — has long been pushed by lobbyists. The cap, as designed, was indeed a disincentive to move staff to Europe. But it was also bluntly ineffective. On that, even UK regulators agreed. If the plan had been to limit bankers’ remuneration in retribution for the financial crisis, it failed: banks typically replaced variable bonuses with higher fixed pay.
For many bankers this was not necessarily a bad thing: who wouldn’t want to swap a variable bonus for a similar amount of fixed salary or so-called “role-based allowances” (RBAs)? It has made practicalities, like securing a mortgage, more straightforward.
But from a bank’s point of view, the cap has been an unhelpful restriction: it has limited the employer’s flexibility to adjust its pay bill in line with changing business fortunes.
So, despite macro-jitters over the slump in sterling and the spike in gilt yields on Friday, the official City view of Kwarteng’s mini-Budget was positive. Ending the bonus cap was the first concrete sign of a promised deregulatory agenda: the main bank lobby group hailed Kwarteng’s “strong backing”.
For banks the removal of the cap is certainly well timed. Just as they face a recessionary economy, and lay-offs begin at Goldman Sachs and other big banks, they will also gain more flexibility in how to pay their staff.
There are niggles. It is uncertain whether banks will have the pricing power to renegotiate contracts with staff that had embedded higher salaries and other fixed pay.
For the best bankers, this is still a competitive environment. It has cooled significantly since last summer’s peak, when multiyear guaranteed bonuses, on top of higher fixed pay, became the norm again as banks increased staff numbers to keep pace with the rebounding economy. Today the technology sector is less of a competitive threat for bank “talent”, as the value of equity packages has declined. But bank bosses warn that other areas of finance, such as private equity, are still in boom mode — for now.
As the economic downturn intensifies, though, banks’ ability to limit their pay bill should be aided by Kwarteng’s axing of the bonus cap. New recruits in particular can expect salaries to be lower in future, and though bonuses might be potentially higher to compensate, that may not be the case for many during the tricky times ahead.
Kwarteng’s decision is underpinned by economic logic (the greater flexibility for employers) and ideological consistency (his Thatcherite deregulation pledge). But it also has political appeal. Yes, some Red Wall Tory votes may be sacrificed, but for Truss and Kwarteng, it’s just a question of which votes you want to secure. True Brexiters will be rejoicing at one key ancillary benefit of ditching the EU bonus cap: the staff of UK banks anywhere in the world, and of foreign banks in the UK, will be liberated from its restrictions; the exception being EU banks whose staff in London or anywhere else will continue to be governed by it. Expect Kwarteng to cite this as a quick Brexit dividend.