The Daily Telegraph

Bank backs Kwarteng on ditching bonus cap

Threadneed­le Street makes rare interventi­on in favour of scrapping prebrexit rule in boost for PM

- By Tom Rees, Tim Wallace and Patrick Mulholland

The Bank of England has backed Kwasi Kwarteng’s plan to scrap the cap on bankers’ bonuses in a rare public interventi­on, as ministers plot a bonfire of red tape dubbed “Big Bang 2.0”. The Chancellor is mulling a move to scrap the cap introduced by EU legislatio­n in 2014 despite the political difficulti­es of unchaining City pay at a time of soaring living costs. The Bank said it had never backed the cap and there were more effective measures to stop excessive risk-taking by bankers.

THE Bank of England has backed Kwasi Kwarteng’s plan to scrap the cap on bankers’ bonuses in a rare public interventi­on, as ministers plot a bonfire of red tape in a “Big Bang 2.0”.

Threadneed­le Street said it had never supported the cap, which was imposed before Brexit, and added that there are more effective measures to stop excessive risk-taking by bankers.

Kwasi Kwarteng, the Chancellor, is 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 cap limits banker payouts to twice their annual salary and is believed to be pushing talent away from London.

It came as a survey revealed that confidence in the Bank of England’s ability to control inflation has plunged to a record low amid spiralling prices and rising interest rates.

Critics of the bonus cap argue that ditching it can boost the Square 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. This means that pay cannot be cut as easily during a downturn, when in the past it would have been possible to simply scrap bonuses.

The Bank of England said: “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.”

The statement is highly unusual for the Bank, which almost never comments on proposals coming from Whitehall. It is likely to be interprete­d as an olive branch to Liz Truss as she embarks on major reforms to the City that threaten to shake up regulation at Threadneed­le Street.

The Bank is concerned about Ms Truss’s plans to override rulemaking on Threadneed­le Street, as well as a looming clash over post-financial crisis regulation­s for the City, such as Solvency II rules for insurers.

Mr Kwarteng has told banks 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.

Andrew Bailey, 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 also criticised the policy.

Prof Len Shackleton, research fellow at the Institute of Economic Affairs, said the cap is “typical EU overstretc­h” but cautioned that the short-term benefits to removing it are likely to be limited.

He said: “In the longer term, it sends out a signal that we’re open for business, that regulation is going to be looser than in Frankfurt or Paris.

“Previously, under these rules, if you wanted to increase the bonus, you had to increase the base salary as well. But business should reward performanc­e.”

It came as the Bank’s own survey of the public found one quarter of people are satisfied with its performanc­e, while one third describe themselves as dissatisfi­ed. The remainder are uncertain or expressed no opinion either way.

The survey came after inflation hit 10.1pc in July, the first time it has reached double digits since 1982.

Consumer price inflation slowed to 9.9pc in August but is expected to rise again in the coming months.

This leaves the Bank with a net satisfacti­on score of minus 7pc, its worst performanc­e on record.

Meanwhile, the World Bank warned that rapid interest rate increases risk setting off a spate of financial crises and sparking a global recession in 2023.

David Malpass, president of the organisati­on, said: “Global growth is slowing sharply. My deep concern is that these trends will persist, with longlastin­g consequenc­es that are devastatin­g for people in emerging market and developing economies.”

The Eu-wide decision to cap bankers’ bonuses never made sense. It was such a bad idea that the UK Government looked into whether it could take the European Commission to court over the idea. Attempts to compare a banker’s salary to a nurse’s salary are made to distract from the real debate, which on every other ground is unwinnable: mainly because the decision of a company to dish out extra pay is explicitly a private one between an employer and an employee. A bank’s decision to pay one of their successful bankers a large bonus costs the state nothing.

As the Bank of England has made clear, there are far better ways of controllin­g risk in the industry than capping bonuses – the performanc­erelated part of banker’s pay. Still, successive government­s felt compelled to meddle in setting pay after the financial crash – mostly for show – to create a sense of punishment and future fairness. But that show has proved costly, making the City a less desirable place to work and reducing the income tax revenue that might then be used to give nurses a pay boost.

So Kwasi Kwarteng, the new Chancellor, would be right to scrap the cap, as has been hinted at this week. Indeed, he and the Government should put on their own show, making the case as to why heavy-handed government interventi­ons and punitive state regulation­s stand in the way of boosting the economy. If you want a more prosperous country, let workers earn more money. If you want more redistribu­tion and more resources for public services, let workers earn more money. It is not a question of Left ideology versus Right ideology, but rather a question of being pro-growth or anti-growth.

Liz Truss made it clear during the Tory leadership election which side of this debate she fell on. Addressing this salary cap would be an early indication that she is serious about weeding out outdated rules and regulation­s that impede economic growth.

But it must only be the start. If Truss and Kwarteng are serious about targeting 2.5pc growth per annum – as the Chancellor was reported to have instructed the Treasury – it is going to take far more radical proposals than what’s been announced so far. When Truss makes good on her tax pledges, which is expected to happen next week, she will have rolled back the tax burden, not by years or decades, but by a matter of months – roughly back to where it was in March this year, before the National Insurance hike came in.

It speaks to how volatile the UK economy is – and the extent to which government­s have weighed it down – that a 2.5pc growth target should be seen as ambitious. But with current forecasts showing essentiall­y no growth for Britain’s economy – not just for the next year, but for the next several years – far more must be done to achieve it.

It is worth looking at where this has recently been done. In the early days of Donald Trump’s presidency, when the Republican­s had full control of Congress, one of the primary focuses of the administra­tion was growth.

The Republican Party’s tax cuts did not tinker with the tax code: tax rates for every income bracket were cut, putting money back in every worker’s pocket. Businesses were set a flat corporatio­n tax of 21pc, which for some companies reduced their tax burden by a staggering 18 percentage points.

Simultaneo­usly, the administra­tion was transformi­ng federal attitudes towards regulation. Having originally pledged to remove two regulation­s for every new regulation brought in, by the end of 2017 the Trump administra­tion was claiming it had removed 22 regulation­s for every new one (although organisati­ons like Washington DC’S Cato Institute point out that “not all regulation­s are created equal”). The number of new regulation­s being introduced slowed considerab­ly during the Trump years, while loosening rules around oil and gas drilling had considerab­le impact on US growth and improved the country’s energy security.

While plenty of people criticise the tax cuts for wealthy Americans, it is much more difficult to argue against what the combinatio­n of policies achieved. Its economy grew by 3pc in 2018, while 2019 saw the median income hit a record high of $68,700 (£60,000), up almost 7pc in the year.

Of course, the UK and US have different policy battles to fight, and Truss would need to find her own areas to overhaul and reform. But significan­t growth is unlikely to happen without significan­t reform.

The Truss administra­tion may be dreaming big – but whether it is ready for the controvers­ial battles that will come up in the pursuit of growth policies is what really matters. Making the case for bankers’ bonuses would suggest the Truss administra­tion is up for the fight. But if the new Prime Minister is successful in her mission to boost growth, scrapping the cap will be a footnote compared to the other changes that would need to take place.

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