Kwarteng considering removing cap on bankers’ bonuses as part of City shake-up

The Chancellor is reportedly weighing up whether to remove a cap on bankers’ bonuses as part of a shake-up of City rules (Kirsty O’Connor/PA) (PA Wire)

Chancellor Kwasi Kwarteng is considering scrapping the cap on bankers’ bonuses, under a post-Brexit overhaul of City rules.

The cap introduced by European Union legislation in the wake of the 2008 financial crisis limits annual pay-outs to twice a banker’s salary, and removing it would prove controversial.

Sources close to Mr Kwarteng said that no final decisions had been made, but suggested such a move as part of a wider package would make London a more attractive place for global banks.

Liz Truss’s Chancellor has promised a growth-focused shake-up of the economy and told City bosses last week: “We need to be decisive and do things differently.”

No official decision has been made over the move yet, sources say (Victoria Jones/PA) (PA Wire)

But allowing bankers’ bonuses to soar as millions feel the strain of the cost-of-living crisis would leave the Government open to easy criticism from opposition parties.

While prime minister, Boris Johnson was forced to say he was not planning to lift the cap, as he faced a political backlash for reportedly considering the move in June.

Labour leader Sir Keir Starmer accused him of plotting “pay rises for City bankers, pay cuts for district nurses”.

Lifting the cap would also come at a time when the Government is refusing Labour’s demands for the multibillion pound strategy to help families and businesses through the energy crisis to be paid for by a windfall tax on the soaring profits of gas and oil giants.

City bosses have been critical of the cap, but its supporters say that unfettered bonuses aided the excessive risk-taking that led to the financial crisis.

Next week Mr Kwarteng is expected to announce a mini-budget to help the country as it faces soaring bills stemming from Russian President Vladimir Putin’s invasion of Ukraine.

But it was unclear whether an announcement on bankers’ pay would come in that “fiscal statement” or as part of a wider package later on.

Economist Andrew Sentance, who was a member of the Bank of England’s Monetary Policy Committee during and after the financial crisis, criticised the timing of the plans.

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We know that bonuses in the financial services sector have helped the richest 1% of the population to capture an increasing share of total UK incomes

Luke Hildyard, High Pay Centre think tank

“It sends a rather confused signal when people are being squeezed in terms of the cost of living and the Government is trying to encourage pay restraint in the public sector,” he told BBC Radio 4’s Today programme.

“So to appear to allow bankers to have bigger bonuses at the same time doesn’t look very well timed.

“There may be some longer-term arguments for pursuing this policy, but I think the timing would be very bad if they did it now.”

Luke Hildyard, the executive director of the High Pay Centre think tank, said removing the cap would be an “ideological measure” that favours the rich.

“The bonus cap has probably helped to contain bankers’ pay awards but they’ve still reached record highs this year while the rest of the country has undergone an epic cost-of-living crisis and profound economic hardship,” he added.

“We know that bonuses in the financial services sector have helped the richest 1% of the population to capture an increasing share of total UK incomes.

“Removing the cap would be a pro-rich ideological measure that sends a depressing message about who policymakers listen to and think about when making economic policy.”