UK Edition
The Bank of England has backed Kwasi Kwarteng's plan to scrap the cap on bankers’ bonuses in a rare public intervention, as ministers plot a bonfire of red tape dubbed “Big Bang 2.0”.
Threadneedle Street said it had never supported the cap, which was imposed before Brexit, and added that there are more effective measures to stop excessive risk-taking by bankers.
Kwasi Kwarteng, the Chancellor, is mulling a move to scrap the banker bonus cap introduced by EU legislation in 2014 despite the political difficulties of unchaining City pay at a time of soaring living costs.
The cap limits banker payouts to twice their annual salary and is believed to be pushing talent away from London.
It came as a survey revealed that confidence in the Bank of England’s ability to control inflation has plunged to a record low amid spiralling prices and rising interest rates.
Critics of the bonus cap argue that ditching it can boost the Square Mile’s global competitiveness after Brexit and give banks more flexibility to reduce costs in downturns.
Since the cap, banks have been forced to pay staff a higher base salary in order to hire talented workers. This means that pay cannot be cut as easily during a downturn, when in the past it would have been possible to simply scrap bonuses.
A Bank of England spokesman said: “The Bank did not support the bonus cap when it was introduced. The Senior Managers Regime and remuneration rules requiring deferral of bonus payments are more effective tools for ensuring bankers take proper account of risks.”
The statement is highly unusual for the Bank, which almost never comments on proposals coming from Whitehall.
It is likely to be interpreted as an olive branch to Liz Truss as she embarks on major reforms to the City that threaten to shake-up regulation at Threadneedle Street.
The Bank is concerned about Ms Truss’s plans to override rulemaking on Threadneedle Street, as well as a looming clash over post-financial crisis regulations for the City, such as Solvency II rules for insurers.
Mr Kwarteng has told bank bosses to expect a post-Brexit “Big Bang 2.0” for financial services, referring to the boom in the City sparked by a wave of deregulation under Margaret Thatcher in the 1980s.
Andrew Bailey, Governor of the Bank of England, said last year that the cap is not “the best way to address remuneration” while his predecessor Mark Carney also criticised the policy.
Professor Len Shackleton, research fellow at the Institute of Economic Affairs, said the cap is “typical EU overstretch” but cautioned that the short-term benefits to removing it are likely to be limited.
He said: “In the longer term, it sends out a signal that we’re open for business, that regulation is going to be looser than in Frankfurt or Paris.
“Previously, under these rules, if you wanted to increase the bonus, you had to increase the base salary as well. But businesses should reward performance, rather than being incentivised to give larger base salaries across the board.”
It came as the Bank’s own survey of the public found one quarter of people are satisfied with its performance, while one-third describe themselves as dissatisfied. The remainder are uncertain or expressed no opinion either way. The survey came after inflation hit 10.1pc in July, the first time it has reached double digits since 1982.
Consumer price inflation slowed to 9.9pc in August but is expected to rise again in the coming months.
This leaves the Bank with a net satisfaction score of minus 7pc, its worst performance on record. Even in the financial crisis, the index never tipped below zero, a moment first reached with a score of minus 3pc three months ago.