The Labour Party has come under fire after it emerged that it had no intention of changing former prime minister Liz Truss’ scrapping of bankers’ bonuses.
The European Union introduced rules in 2014 to avoid another economic crisis like the one in 2008.
It did this by limiting the bonuses that bankers could earn. The lack of a limit on bonuses aimed to motivate bankers to overperform and grow the economy.
Former Tory leader Truss then scrapped the rules in what she claimed was an effort to attract more business to the country.
As the Guardian reported, the decision received widespread criticism for rewarding bankers and failing to address cost of living concerns affecting households across the UK.
However, it was one of the few mini-budget policies to be kept under Rishi Sunak’s leadership, with the new rules introduced in October 2023.
The Labour Party had previously spoken out against the “out-of-touch” move, highlighting the financial pressures families face. However, it seems like it has since changed its tune.
Of the bankers' bonuses cap, shadow chancellor Rachel Reeves told the BBC on Wednesday (January 31) that the party “does not have any intention of bringing that back”.
She said: “The cap on bankers’ bonuses was brought in in the aftermath of the global financial crisis and that was the right thing to do to rebuild the public finances.“But that has gone now and as chancellor of the exchequer, I would want to be a champion of a successful and thriving financial services industry in the UK.”
How much is a normal banker's bonus?
Before the removal of the cap, bankers’ bonuses could be only 100 per cent of their salary.
The exact percentage was determined by the investment banking company, with factors including how long someone had been with the company being considered. However, according to analysts, the percentage of base salary generally used to calculate year-end bonuses ranged from 70 per cent to 100 per cent.
In some cases, bonuses of more than 100 per cent could be awarded to top performers and more senior investment banking roles.
Now there is no cap on bonuses, meaning the sky is the limit.
How do banking bonuses work?
Bankers' bonuses are awarded at the end of a bank's financial year.
They reward employee behaviour that has increased the profits of the bank or some relevant part of its business, as shown by the annual accounts.
Why were bankers' bonuses capped and why was the cap scrapped?
Introduced in 2014, when the UK was part of the EU, the cap was designed to curb excessive risk-taking in the financial services industry following the 2008 financial crash.
The cap limited the variable pay of employees of banks, building societies and investment firms to double their base pay.
Finance bosses had long complained about the rules, saying they led to higher base pay that increased banks' fixed costs.
The decision to scrap the cap was subject to a Financial Conduct Authority and Prudential Regulation Authority (PRA) consultation, which decided that the bonus cap had “unintended consequences”.
They added that when fixed or base pay accounted for the biggest share of remuneration, employers had less room to vary employee pay due to "material poor performance or misconduct".
The cap on bonuses was lifted on Tuesday, October 31.
