Forum Topic

This is not good news......

Cap on bankers' bonuses to be scrapped On 31 October 2023 so it seemshttps://www.bbc.co.uk/news/business-67206997

Ivonne Holliday ● 564d13 Comments

Hello Steven,Sadly, recent governments have made political decisions on the basis of what they were (un)likely to achieve for everyone's benefit and certainly based on the message that they preferred to send out (called populism?).  I agree with you that the recommendation on revoking caps on bonuses came from the Financial Conduct Authority but I very much doubt it reached it independently.  I say this because the bonus caps were introduced by the EU in 2014 - together with ATAD that many in government hated.Responding to your previous post, "whole idea of the bonus cap was to remove the incentive to engage in risky deals which could threaten the stability of the banking system" is correct.  Perhaps I could remind you that, as the result of the financial crisis in 2008, the taxpayer "shored up" 6 banks and building societies (Northern Rock, Bradford and Bingley, Royal Bank of Scotland, HBOS, Lloyds TSB, Dumfermline B/S).  At the time, it all brought back the horrible memories of Nick Leeson and Barings Bank in 1995.....  If I may be so crude and rude, you said that "in order to attract the best people in a competitive environment (you need to pay high salaries and even higher bonuses. My comment:  even if the business had failed).  Also, those that produced the banking collapsed can be described as spoilt brats playing dangerous games - with catastrophic results.I never said that bankers' salaries should be capped, you did. Neither did I say that the private sector should be somehow subjected to intervention.  However, and there is always one, one thing is having fair earnings and bonuses - that should be the practice.  What I have always strongly objected to is the obsence level of bonuses (even in the early 1990s) that these bankers and people in the financial sector - as well as other industries, awarded themselves - even in situations of total failure.I agree with you, pop stars also earn copious quantities and footballers - the least said on the latter the better!  The great difference is that taxpayers do not prop them up if they fail. We are all aware that introducing higher taxes to the rich means the funds are immediately transferred to offshore accounts and there is not tax benefit. As for defrauding HMRC, that is not the prerrogative of only the super rich. One thing I would do though, is revise (upwards) the tax bands as well as the Council tax bands. "The truth is that I don't really have an answer." Neither do I.What I certainly hope for (but pigs may fly) is that honesty returns together with humility - particularly for politicians - and fair play. I am a true believer that not only the City needs to be successful, but all industries in the country.  To achieve this, we must all ensure that education is improved tremendously (after all, some of these kids will be the bankers of tomorrow), but greater investment in health for all, in R&D for science (excluding space travel) and climate change of course.  The arts also need investment. Apologies for this long reply.

Ivonne Holliday ● 563d

Surely political decisions should be made on the basis of what they are likely achieve rather than on the ‘message’ they send out.  I would be far more concerned if the government declined to adopt a reasonable measure because they were worried about how it would play out among the voters in the ‘Red Wall’. In any case the removal of the bonus cap has been recommended by the Financial Conduct Authority, not the government.

Steven Rose ● 563d

Exactly, Richard!

Ivonne Holliday ● 564d

Agreed, and I just want to underline the point that although when you look into it the practical effect of removing the cap may be small, but the overall message it sends out is devastating. It says, in effect, that you peasants just have to tighten your belts but we masters can stuff ourselves to our hearts' content.

Richard Carter ● 564d

Yes, I'm not sure about the bonus cap in terms if reducing risk but I can see tgat a restricted ratio governing high versus lowest recompense should help create a less inequitable society.  I know some CFOs prefer a bias towards bonuses because it gives them more control if income/turnover fluctuates significantly from year to year, and it can mean fewer redundancies in lean years if fixed costs are kept lower.However, I suspect at a time where many on lower incomes are struggling with inflation,  high interest rates and increased energy costs it's sending a bad message to "red wall" voters who historically aren't Tory supporters. Still, that's Sunak's problem ...

Michael Ixer ● 564d

The whole idea of the bonus cap was to remove the incentive to engage in risky deals which could threaten the stability of the banking system. But in order to attract the best people in a competitive environment, the banks started offering higher fixed salaries instead, which somewhat undermined the point of the bonus cap. This is presumably one of the reasons why the FCA has concluded that it no longer serves a useful purpose.    As to whether bankers' salaries should be capped, that is problematical. Obviously the vast sums earned in the financial sector are galling to those who are having difficulties in making ends meet and who are being  asked to make sacrifices in the present economic climate. But is it justifiable to intervene in the private sector? And why pick on bankers? What about pop stars and footballers? It's a bit different in the public sector where salaries come out of taxes. At the BBC, for example, the average salary for an apprentice is £19 500 pa while the highest paid presenter, Gary Lineker, earns £1.35 million pa, a ratio of 67 : 1. But the argument used by the BBC is that if they don't pay the going rate, the talent will go elsewhere. Some people are in favour of obtaining greater equality by imposing higher taxes on the rich. But punitive tax rates often lead to a lower tax take since a) they depress the economy and b) people tend to defraud HMRC.The truth is that I don't really have an answer.

Steven Rose ● 564d

I am not too sure I follow your logic of "no point in capping bonuses if fixed salaries rise as a result"...  Thank you.

Ivonne Holliday ● 564d

Yes, but there no point in capping bonuses if fixed salaries rise as a result. Or is it proposed that there should be a salary cap? How would that work? At what level should it be set?

Steven Rose ● 564d

Yes, the cap was introduced by the EU and not opposed by the British MEPs.  As you say, it was introduced after the financial crisis of 2008 which, if I remember correctly, was caused by subprime mortgages in the USA as well as high risks being taken by the City in the mortgage market (125% mortgages come to mind?).Skilled bankers have been attracted to rival centres like New York, Zurich and Singapore.  But before Brexit, I seem to recall that London was the financial capital city of the world?  As the article said, the issue of scrapping the bankers bonus cap was first introduced - among other measures - by the former chancellor Kwasi Kwarteng last year.  We know what happened to the economy after his mini-budget.You say: "Secondly the Bank of England has been concerned that the cap has led to a rise in fixed salaries to compensate bankers for the squeeze on bonuses." In other words, what is worrying them is the higher costs in salaries for the banks because with the eye-watering bonuses that were paid they do not need to pay so much in taxes and these bonuses can be paid in tax havens.At the same time, the same people are telling doctors, nurses and teachers they cannot be paid more because of fiscal prudence...  OK, you will argue that I am mixing private and public sector pay.    Who suggested the pay ratio between CEOs and employees be a maximum of 25-to-1 and later reduced to a ratio of 20-to-1? Hmmmmm.I thought we were all in the middle of a financial crisis and prudence should be exercised by all.  What was the saying?  We are all in this together?  Yes, a few years ago but the inequality in this country has risen to unacceptable levels.I do believe, in the strongest possible terms, that fairness should be of greatest importance.

Ivonne Holliday ● 564d

It is the Bank of England Financial Conduct Authority which, following consultation, has scrapped  the banker bonus cap, introduced by the EU in the wake of the financial crisis of 2008. The cap, which since 2014 has been set at twice the annual salary, was intended to deter bankers from taking unjustifiable risks in the hope of obtaining a large bonus. The decision by the FCA to abolish the cap is based on two considerations. Firstly skilled bankers have been attracted to rival centres like New York, Zurich and Singapore where there is no cap. Secondly the Bank of England has been concerned that the cap has led to a rise in fixed salaries to compensate bankers for the squeeze on bonuses. I don’t know why the government has delayed the ban on no fault evictions. But measures to intervene in the rental market do not always have the intended effect. For example, rent controls, which are supposed to ensure that tenants are not asked to pay unaffordable sums, often drive landlords out of the market, causing a scarcity of rented properties, which in turn causes rents to rise.

Steven Rose ● 564d

That is not only a very strong message but a bombshell!!!But it is true, a much higher percentage would have helped.  There again, was the referendum not an advisory one?Funnily enough, when the results of the referendum were announced, I remember watching Farage being interviewed on BBC News and, at the time, he said that the result was unfinished business and that the 52% vs 48% not good enough......  Things one remembers!

Ivonne Holliday ● 564d

Now it's reported that the government is delaying the promised ban on no-fault evictions, for how long isn't clear but it looks like yet another betrayal.

Richard Carter ● 564d

Well, anyone who believed this government were serious and cared about levelling up must now be thinking they were rather gullible? Hasn't Sunak already blocked Gove's plans to reform the archaic feudal leasehold laws? Perhaps more evidence only the wealthy matter and are important to the powers behind the Conservative party? A couple of opportunities there for Mr Starmer: promises of a higher rate of tax on such bonuses, and promises to reform leasehold laws?Also interesting that Steve Baker seems to have said the one thing said by a Conservative Brexiteer that I agree with and believe is the truth …https://www.independent.co.uk/news/uk/politics/brexit-referendum-supermajority-vote-tory-baker-b2434582.html

Michael Ixer ● 564d