Kwasi Kwarteng, the United Kingdom’s newly-appointed finance minister, has certainly made waves in his first few days in office. He took some flak for – on his very first day in office – summarily firing Tom Scholar, permanent secretary to the treasury. Just because, critics of the move claim, the government of new Prime Minister Liz Truss is out to eliminate dissent within the civil service and steamroller any opposition to its plans to ditch economic and fiscal management orthodoxy in favour of a “lurch for growth” agenda (whose details are still rather murky).
Kwarteng is also said to be keen to do away with the cap on bankers’ bonuses, which the bankers who have been relentlessly lobbying for ever since it was introduced tell him will make the City more competitive as an international financial centre. Exactly how is unclear – to me at any rate.
The 2x salary cap on bonuses was introduced in the wake of the global financial crisis (GFC) to deter bankers and traders from engaging in feral risk-taking in the quest to ramp up their bonuses while at the same time endangering the financial system and global economies. The UK has never really liked the bonus cap, introduced as part of the European Union’s post-GFC re-regulation. Former Prime Minister Boris Johnson was said to be keen to get rid of it but feared that doing so would cause political ructions. He wasn’t wrong.
Kwarteng’s plans – which are not yet confirmed – did cause some outpourings. For a start, the timing couldn’t be worse. When millions of Britons are facing a cost-of-living crisis and when Bank of England governor Andrew Bailey is urging workers not to demand pay rises to match raging inflation, having the government change the law to back pay rises for some of the wealthiest and highest paid people in the country is, let’s just say, tone-deaf.
“When millions are struggling to feed their families and keep the lights on, the government’s priority appears to be boosting the telephone number salaries of their friends in the City,” Sharon Graham, general secretary of Unite, the UK’s second-largest trade union, said in a statement. A rather predictable response but she does have a point. “Britain’s economy is now dominated by rampant profiteering,” Graham added. “Last year Britain’s banks made £45.6 billion (US$52 billion) of profits. So the Chancellor’s signal to the city is ‘let it rip’ further and further, while the Bank of England lectures workers about pay restraint. You could not make it up.”
I don’t buy the argument that increasing pay for bankers is good for competition. The idea being put forward by bankers is that removing the bonus cap will enable banks to lower salaries and go back to a bigger variable element in compensation packages. Maybe I’m missing something but how does that change the competitive dynamic?
Mick McAteer, a former non-executive director of the Financial Conduct Authority, the UK regulator, and its predecessor the Financial Services Authority, took to Twitter to voice his concerns. Removing the bonus cap, he wrote, “will encourage the type of aggressive, risk taking socially useless market behaviours we really don’t need”, adding: “If that's not bad enough, looks like gov intends to give itself ‘call in’ powers to override regulators' decisions. So much scope for City lobbyists to get what they want. Regulatory independence under serious threat from political expediency/industry lobbies now.”
I’ve long argued, including in this column last August, that bank executive management teams must resist the temptation to take us back to that pre-GFC era of grubby, greedy money-grabbing. The banking sector has de-risked in recent years, particularly in investment banking where the big bonuses are going to be paid, and morphed away from its former predilection for reckless endangerment. Banks are more akin to financial utilities these days.
They should not revert and risk reversing the goodwill they engendered through the pandemic with ordinary people when they acted as transmission agents for government-support programmes. The UK is in the process of what Nadhim Zahawi, Kwarteng’s immediate predecessor and finance minister for just a few weeks, called “stripping away poorly crafted EU rules” that govern UK financial and capital markets.
Any results of that process will only emerge in the future, so any positive impacts remain to be seen. But removing ceilings from highly-paid bankers’ bonuses should remain outside the perimeter of UK attempts to recraft its financial and capital markets.