The new chancellor, Jeremy Hunt, is pressing on with plans to scrap the bankers’ bonus cap, protecting one of the most divisive policies from his predecessor’s disastrous mini-budget.
A Treasury source said the cap was not included in Hunt’s list of policy U-turns on Monday, which included scaling back tax cuts and the energy price guarantee, given that it did not have an impact on state finances.
The decision to push ahead with lifting the bonus cap as planned will raise eyebrows, even across the City, where bosses say it is unlikely to result in substantial changes to pay, or attract high-flying bankers, and could instead damage lenders’ reputations with the public during the cost of living crisis.
The move drew criticism from opposition MPs, including the shadow chancellor. “What a contrast, that cuts to benefits are still on the table, but the one thing the chancellor couldn’t bring himself to reverse today was lifting the cap on bankers’ bonuses. Why is this the last policy standing in this disastrous mini-budget?” Rachel Reeves said, after Hunt’s statement to the Commons on Monday.
Later, Hunt defended his decision, saying the EU-imposed cap – which limits payouts to two times bankers’ salaries – “didn’t work”, siding with critics concerned that the policy had merely increased fixed salaries to make up for lower bonuses.
“I believe wealthier people should pay more as we go through difficult periods,” Hunt said. However, he stressed the government would get “more tax from rich bankers with the policy we now have”, referring to the 45p rate of tax that it plans to maintain on higher earnings.
The defence came hours after Hunt issued his economic update on Monday, which reversed nearly all of the announcements Kwasi Kwarteng made on 23 September.
The cap was part of changes introduced after the 2007-08 banking crash, and aimed to stamp out a bonus culture blamed for encouraging short-term profits over longer-term stability. The hope was that, with less of an individual’s pay riding on performance, there would be a lower incentive for risky behaviour.
The UK strongly opposed the legislation, which came into force in 2014, with the then chancellor, George Osborne, even attempting to overturn it at the European court of justice. The Bank of England also warned at the time that the cap would lead to a rise in fixed-salary costs and squeeze bank finances.
The move did raise fixed salaries but those extra costs have rarely been blamed for harming lenders’ balance sheets.
Kwarteng announced the plans to scrap the cap in the run-up to his mini-budget, claiming it would spark fresh investment from global banks and create more higher-paying jobs that could boost tax takings.
However, banks complained that they were neither consulted, nor advocated for the change, before it was announced.
A source familiar with the plans confirmed that City regulators were still preparing to consult on the rule changes this autumn. That consultation will be run by the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority, though a date has yet to be confirmed.
But lenders and headhunters have cautioned that any overhaul could take years to implement, as banks try to manage their reputations and limit any potential backlash from investors, the public and even their own staff, given that employees have grown used to the stability of higher base pay.
Meanwhile, the banking sector will probably have to wait until the fiscal update on 31 October to hear more detail on the government’s plans to cut regulation across the City, as well as how they will offset the impact of the corporation tax hike.
Rishi Sunak, the first of this year’s four chancellors, had pledged last year to cut a sector-specific levy, known as the banking surcharge, from 8% to 3% to make up for the increase in corporation tax from 19% to 25%. However, Hunt has not made any commitment to follow suit, despite fears that banks would now have to prepare for taxes worth 33%, rather than 28% as previously promised.
A decision to maintain the surcharge could help the government raise more cash to plug the hole in public finances but could be seen as a windfall tax by stealth. A Treasury source rejected the suggestion and said further details would be released at the end of the month.
