“Greed is good again in the UK”
The UK’s Financial Conduct Authority said Tuesday that it’s ending a cap on bonuses for bankers that’s been in place since 2014. The cap was originally an EU rule that Britain held onto post-Brexit and born out of the economic rubble of the 2008 financial crisis.
As Their Affluence Expands…
Exactly one year ago, UK Prime Minister Liz Truss resigned her post following a disastrous few weeks during which her government’s “mini-budget” sent the UK economy into a tailspin. Moody’s only just reversed its negative outlook on the country a few days ago, saying that its decision to upgrade the UK was partly due to Chancellor Jeremy Hunt abandoning Truss-era policies. However, eradicating the cap on banker bonuses is the only policy to make it out of Truss’ premiership alive.
The UK government is touting the decision as a way to reinvigorate its financial sector. The Bank of England’s Prudential Regulation Authority (PRA) said Tuesday that outside of the EU bankers rarely have their bonuses capped:
- The 2014 rule capped bankers’ bonuses at twice their base salary. The FCA and PRA argued in a joint statement that this meant UK banks raised base pay to stay competitive, meaning that in leaner years they were less able to cut costs.
- Across the pond, bonuses have been in for some haircuts over the past nine months. Wall Street banks cut bonuses by as much as 30% at the end of last year, and compensation consultant Johnson Associates predicted in August that M&A investment bankers could expect a 20%-25% drop in bonuses.
A Silver Lining: The 2008 crisis led the UK government to nationalize the Bradford & Bingley and Northern Rock banks. While that may have been a deeply embarrassing moment for all concerned at the time, now the UK Treasury is lined up to net a £100 million surplus from the banks’ pension schemes, sources told the Financial Times.
UK to End Cap on Bankers’ Bonuses
The UK’s Financial Conduct Authority (FCA) has announced the end of the cap on bonuses for bankers that has been in place since 2014. The cap, originally an EU rule, was held onto post-Brexit and was born out of the aftermath of the 2008 financial crisis.
Government’s Decision and Rationale
The decision to end the cap on banker bonuses is seen by the UK government as a move to revitalize the country’s financial sector. According to the Bank of England’s Prudential Regulation Authority (PRA), bankers outside of the EU rarely have their bonuses capped. The 2014 rule in the UK capped bankers’ bonuses at twice their base salary. The FCA and PRA argued that this led UK banks to raise base pay to remain competitive, making it difficult for them to cut costs during leaner years. In contrast, Wall Street banks have seen reductions in bonuses over the past year, with some institutions cutting bonuses by as much as 30%. In August, compensation consultant Johnson Associates predicted a 20%-25% drop in bonuses for M&A investment bankers.
Implications and Controversy
The decision to abolish the cap on bankers’ bonuses has garnered attention and raised debate. Supporters believe it will make the UK more attractive to top talent in the financial sector, boosting the economy. Critics argue that it could lead to excessive risk-taking and a return to the practices that contributed to the 2008 financial crisis.
A Silver Lining for the UK Treasury
The 2008 crisis resulted in the UK government nationalizing the Bradford & Bingley and Northern Rock banks. However, the country’s Treasury is now expected to benefit from a £100 million surplus from the pension schemes of these banks, according to sources.
This announcement comes one year after UK Prime Minister Liz Truss resigned following an economic downturn caused by her government’s policies. Moody’s recent decision to reverse its negative outlook on the UK was partly attributed to Chancellor Jeremy Hunt’s departure from those policies, although the abolition of the cap on banker bonuses is the only surviving policy from Truss’ tenure.
In conclusion, the UK’s decision to end the cap on bankers’ bonuses is aimed at revitalizing the country’s financial sector. It is a move that has both supporters and critics, with potential implications for the economy and concerns about the reemergence of risky practices. Meanwhile, the UK Treasury stands to benefit from a surplus of £100 million from the pension schemes of nationalized banks.