The government will need to do better than Big Bung 2.0

Did Big Bang 2.0 just become Big Bung 2.0?

The government hopes that lifting the cap on bankers’ bonuses, introduced by the EU after the financial crisis, will serve as a statement of intent for its plans to rejuvenate the City.

Certainly, the industry is enjoying some political warmth after a decade out in the cold since the financial crisis, finding itself sidelined in the Brexit negotiations and highlighted as the antithesis to the last government’s mantra of levelling up. But the idea of ditching the bonus cap also underlines the lack of fresh thinking in what is supposedly a post-Brexit banner policy.

The reality is that the UK never liked the European cap, which from 2014 limited bonuses to 100 per cent of fixed pay, or 200 per cent with shareholders’ blessing. George Osborne, while Chancellor, made repeated attempts to overturn the policy, arguing correctly that it would increase the fixed component of pay and wouldn’t limit the total amount paid in bonuses.

It was seen as a bit of Brussels rulemaking squarely directed at highly paid people predominantly in the City of London. According to the European Banking Authority, average fixed pay for managers in UK institutions more than doubled to €1.5mn in 2014 on the year before, compared with a 17 per cent rise to €379,000 across the EU as a whole. Fixed pay has soared higher and higher ever since.

The justification for the cap was also questionable. The notion that bonuses fuelled risk-taking in the pre-2008 credit boom is debatable at best. The UK’s post-crisis commission on banking, hardly a pushover from the sector’s standpoint, broadly took the view that if banks really had enough capital, and remuneration structures were right, then there was no great need to regulate pay. The UK had already introduced important changes like deferring payment of bonuses and clawback provisions in contracts by the time the cap came along (which presumably will and certainly should be maintained).

The verdict on impact has been similarly mixed. A Bank of England study suggested the cap plus other changes could have curbed excessive risk-taking. The IMF has worried it can deter “good” risk taking, exacerbating under-investment. Other studies have found negligible effect.

Bank bosses have tended to play down the cap as a symbolic inconvenience, while simultaneously calling for it to be scrapped. In truth, its removal would be important to the big US banks, because it causes problems for moving staff back and forth between London and New York, and to other investment banks.

At the margin, it would make London an easier place to put staff, after its attractiveness as a European hub was diminished by Brexit. Salaries are hard to force down. But the current widespread use of fixed allowances to top up base salaries means remuneration could be restructured quite quickly, giving more flexibility to cut pay rather than staff in a downturn. Given the slump in investment banking activity, abolishing the cap mightn’t be the immediate boon to bankers’ pay packets that its critics assume.

It is certainly bold to be seen to unshackle banker pay — which has been rising very nicely, thank you — against the backdrop of a cost of living crisis. It inevitably risks tarnishing the idea of Big Bang 2.0, the poster child for all wannabe Brexit dividends and a policy that has yet to be defined by its proponents.

The name also confusingly evokes 1980s reforms that ushered in more financial oversight but this time in support of a post-Brexit deregulatory push.

City practitioners of all stripes complain that, despite the soundbites, the progress so far has amounted to endless wrangling over modest rule changes, rather than any overall political direction or plan that could make a meaningful difference or that embraces the inevitable trade-offs involved. And although there has been a good deal of political noise about overcautious watchdogs and burdensome rules, the most disliked new edict in the Square Mile currently is the Financial Conduct Authority’s forthcoming “consumer duty” to protect retail customers, a project that was conceived at the express direction of parliament.

The bonus cap wasn’t a clever or effective bit of rulemaking. But giving banks back control over their pay also doesn’t amount to a radical reform agenda — and isn’t enough to win over the City, let alone its critics.

helen.thomas@ft.com
@helentbiz