U.K. Considers Letting Banks Pay Bigger Bonuses
The British government, led by new Prime Minister Liz Truss, is looking at ways to attract financial stars from New York and elsewhere
LONDON—The U.K. is considering a plan to allow banks to pay bigger bonuses to their star traders and bankers, the latest salvo in an intensifying competition between London and other financial hubs about where to trade and invest money.
Since 2014, U.K. banks have been subject to European Union rules that restrict banks from paying bonuses of more than twice an employee’s salary. For bankers earning $500,000, that means they can get no more than a $1 million bonus.
U.K. Prime Minister Liz Truss, who took office this month, is an acolyte of Margaret Thatcher and has pledged to follow the late prime minister’s lead in deregulating the financial sector. Ms. Truss has said easing rules on business would stimulate the U.K.’s moribund economy and maintain London’s perch as one of the world’s leading trading centers.
The U.K. can lift the cap because it is no longer part of the EU, the trading bloc that it fully departed last year as a result of the 2016 Brexit referendum.
In potentially the big first step toward further deregulation, the new chancellor of the exchequer, Kwasi Kwarteng, is considering lifting the bonus cap, a Treasury official said Thursday. The Financial Times newspaper first reported the plan.
The Bank of England, which regulates banks in the U.K., said it opposed the cap and that it believed in other ways to limit financial risk taking, such as rules that allow banks to recoup bonuses if trades go bad.
The bonus cap was part of Europe’s response to the 2008 global financial crisis. The EU argued that the prospect of big end-of-year bonuses had encouraged bankers to engage in risky trading and investments that contributed to the collapse of financial markets. They put the cap in place to reduce the incentives for risk taking.
Banks opposed the rules. They have said the cap hasn’t reduced bankers’ incentives but has simply shifted how they are paid, toward higher fixed salaries. That shift, they say, has meant that bankers get paid high salaries even in years when they perform poorly.
London’s financial sector is facing some competition from European cities like Paris and Amsterdam in the wake of Brexit. France and Italy have offered tax incentives to woo Londoners and other rich expats after Brexit. The EU has moved to requiring certain financial functions to take place on the continent.
William Wright, managing director of New Financial LLP, a finance industry-backed research group, said there was anecdotal evidence that top finance executives in New York have resisted moving to London because of the salary cap.
He said evidence supports the banks’ claims that the cap has, inadvertently, boosted many bankers’ fixed salaries, but that scrapping the bonus cap now—when inflation is soaring and the public is mourning the death of Queen Elizabeth II—could lead to a political backlash.
“Scrapping the bonus tax would be seen by many voters—at a time when they’re facing a cost-of-living crisis and the highest inflation in 40 years—as the government prioritizing allowing already highly paid wealthy individuals to be paid more,” Mr. Wright said.