the bonus cap has always been pure politics

Ah, hello bonus cap, my old friend. I rather suspect that I have written more about this contentious issue than any other during my career as a financial journalist. And I’ve come to believe that it is one of the best illustrations of how business and politics often talk at cross purposes and are frequently separated by a shared language.

Generally the business world likes to focus on logic and economics; politicians are far more concerned with narrative and optics. Sometimes these differing concerns overlap on the Venn diagram, other times the different circles are on different pages of different books housed in different libraries.

Business people want to examine the details, politicians like to simplify. Executives suspect an edge can be found in nuance, lawmakers mostly paint the world in black and white. “But that’s not how it works!” cry business people and bankers in exasperation. “But can’t you see how it looks ?!” reply the politicians with equal and opposite irritation.

Enter the bonus capwhich was introduced by Brussels in 2014 in response to the financial crisis. It limits a banker’s annual bonus to twice their salary. This effectively means that, if they get a salary of £ 1m a year, say, their annual bonus can be no more than £ 2m. I sense you’re not tuning up your violins.

Did introducing the bonus cap stop bankers taking reckless risks? Will removing it ensure that the City of London maintains its status as one of the world’s leading financial centers and claws back some of the activity that has escaped to the European Union following Brexit? If you are even asking those questions, then I’m afraid a career in politics is not for you; you’re missing the point.

A whole raft of new regulations were brought in after the financial crisis. The ones that made the biggest difference to how banks actually behaved were, in descending order of importance, the requirement to hold more capital, new resolutions mechanisms that allowed regulators to “bail in” the creditors of failed lenders and the ring-fencing of retail from investment banking operations.

There’s no clear evidence that the bonus caps made bankers any less likely to take reckless risks. And two times a lot of money is still an awful lot of money.

But equally, banks have countered the cap by increasing base salaries regardless of how well the individual banker performs, which is a tricky thing for fans of the cap to defend.

It’s also true that the cap did increase the fixed costs of employing a banker in London and the EU as opposed to, say, New York. It therefore potentially did weigh on the competitiveness of the UK’s financial services industry. But only very slightly and only at the margins.

In other words, the cap is quite a lot of fuss about nothing and certainly doesn’t merit the amount of time I’ve spent writing about it over the years.

The real reason it was imposed was because politicians wanted to signal they understood public anger about the financial crisis and felt they must be seen to have punished bankers in some way.

It is now being removed for a similarly political reason: because Liz Truss wants to demonstrate she is serious about boosting economic growth and is prepared to make unpopular choices to achieve that aim.

Removing the bonus cap is also something that the UK very clearly couldn’t have done if it was still part of the EU and can therefore be branded as a Brexit benefit.

Will it offset the downside to the City of no longer being part of the single market? Will it hell. But, again, it signals that Truss is at least willing to try and make life easier for this country’s hugely important financial services sector.

Economically all this tax-cutting is a bit of a gamble. The Government is planning to halt a planned rise in corporation tax, reverse the recent rise in national insurance and possibly reduce stamp duty. Even if these measures do boost growth – a very open question – will they do so before the public finances take a turn from bad to worse and, perhaps more pertinently for Truss, before the next General Election?


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