Kwarteng argues the move would make London a more attractive destination for top global talent and would be a clear signal of the new ‘Big Bang 2.0’ approach to post-Brexit City regulation, according to his colleagues. Boris Johnson has avoided lifting the bonus cap, fearing a political backlash, but Kwarteng told City officials last week: “We have to be decisive and do things differently.” While no final decisions have been made, people close to the chancellor’s thinking said he wanted to scrap the cap, introduced by EU law in 2014, as part of a package of city reforms. The UK has long opposed the EU’s bonus cap, which caps year-end payouts at twice a banker’s salary. For example, if a bank wanted to pay someone £3m in London, they would have to pay them a salary of at least £1m. When the idea was mooted in June, Labor leader Sir Keir Starmer described it as “pay rises for bankers, pay cuts for district nurses”. But senior Tories say Kwarteng is “shamelessly” looking for ways to boost growth. To play down criticism that he was helping wealthy bankers, the chancellor would frame the move as part of Britain’s recently announced £150 billion government intervention to help families and businesses in the energy crisis. Kwarteng will deliver a mini-budget next week and the Finance Ministry said it would not comment on speculation ahead of a budget event. Some in the Treasury believe the chancellor could make a separate announcement on the City’s reforms at a later date. Liz Truss called the city “the jewel in the crown” of the British economy. Those briefed on the discussions say Kwarteng wants to boost London’s competitiveness against New York, Frankfurt, Hong Kong and Paris, which offer tax incentives to attract top bankers. One financial executive said that removing the cap would be “a clear Brexit dividend. Something you can present as a victory.” The cap was a particular annoyance for US investment banks that employ tens of thousands of staff in London. Wall Street typically includes large elements of annual performance-related bonuses and lower fixed salaries in its pay packages. “The tax risks pushing the best people to the US where they can be better paid,” said one financial services executive. “It also distorts the pay performance figures as it means you have to pay a high basic salary which is not incentivised. But it will be a hard sell publicly in a period of austerity.” An unintended consequence of the current system is that in more years of fallow income, it is more difficult or impossible to reduce an employee’s salary compared to a discretionary bonus, which can be fully deducted. Goldman Sachs has been one of the most outspoken opponents of the bonus cap. Richard Gnodde, the bank’s head of international operations, told the Financial Times that removing the bonus cap would make “London certainly a more attractive place”. He said that under the current system, “if I move a senior person between New York and London, I increase the fixed costs of our operations.” He added: “If that rule doesn’t exist, I don’t have to think about it.” The Bank of England’s Prudential Regulator has privately dismissed the cap as a “blunt tool” to control excess and align bankers’ pay with their performance and the risks they take. Other UK rules make senior executives liable to a fine, ban or even jail time for omissions on their watch, and there are clawback provisions that can withhold or claw back bonus payments as punishment. The UK version of the bonus cap applies globally to companies based in the UK as well as staff of international banks based in the country. Removing the cap would be a major boost for Barclays, which runs the last major UK-based investment bank and pays 700 people – most of them in New York – more than €1m. It would also benefit HSBC, which has most of its staff in Asia, mainly in Hong Kong. However, staff at European banks in London and globally will still be subject to the cap. “If it changes, it’s not life and death, but it will make it even harder for us to compete in London and with US banks in general,” said a senior executive at a London-based EU firm. “Banks don’t pay people more because there’s no cap, but in a bad year we have less flexibility to cut costs on the downside. . . it makes things more difficult.” The person added: “It’s exciting . . . It’s not a vote winner, I’m surprised it’s being talked about.”
