The Bank of England (BoE) has backed the new Chancellor of the Exchequer, Kwasi Kwarteng's plan to scrap the cap on bankers’ bonuses in a rare public intervention, the Daily Telegraph reported.
The BoE said it had never supported the cap, the newspaper said, which was imposed before Brexit, and it noted that there are more effective measures to stop excessive risk-taking by bankers.
The Chancellor was said on Thursday to be mulling a move to scrap the banker bonus cap introduced by EU legislation in 2014 despite the political difficulties of unchaining City pay at a time of soaring living costs, the newspaper noted. The cap limits banker payouts to twice their annual salary.
Critics of the bonus cap argue that ditching it could boost the Square (NYSE:SQ) Mile’s global competitiveness after Brexit and give banks more flexibility to reduce costs in downturns. Since the cap, banks have been forced to pay staff a higher base salary in order to hire talented workers.
The Telegraph quoted a BoE spokesman as saying: “The Bank did not support the bonus cap when it was introduced. The Senior Managers Regime and remuneration rules requiring deferral of bonus payments are more effective tools for ensuring bankers take proper account of risks.”
Andrew Bailey, the governor of the Bank of England, said last year that the cap is not “the best way to address remuneration”, while his predecessor Mark Carney had also criticised the policy.
The new Chancellor, who will hold a mini-Budget next Friday, September 23, 2022, has reportedly told bank bosses to expect a post-Brexit 'Big Bang 2.0' for financial services, referring to the boom in the City sparked by a wave of deregulation under Margaret Thatcher in the 1980s.
However, in spite of the BoE's welcoming of the bonus cap move, unions were not pleased.
The Guardian reported that Frances O’Grady, the general secretary of the Trades Union Congress (TUC) said: “The chancellor’s No 1 priority should be getting wages rising for everyone – not boosting bumper bonuses for those at the top.”
And Sharon Graham, the general secretary of the Unite union, said workers would be “appalled and angry”, the newspaper added. It quoted her as saying: “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.”
Meanwhile, Andrew Sentance, a member of the Bank of England’s monetary policy committee (MPC) during and after the financial crisis, said it was a “very bad” time to consider increasing banker’s bonuses.
Speaking on BBC Radio 4’s Today programme on Thursday, Sentance said it risked sending “a rather confused signal” amid inflation squeeze.
“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,” the MPC member added.