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Kwarteng scraps banker bonus cap

by LLB Reporter
23rd Sep 22 10:15 am

As part of his mini budget, new chancellor Kwasi Kwarteng has scrapped the banker bonus cap that came into effect after the financial crisis.

On the controversial subject on bankers’ bonuses, Kwarteng defended his decision to end the cap on them by saying: “A strong UK economy has always depended on a strong financial services sector. We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.

“All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe. It never capped total remuneration, so let’s not sit here and pretend otherwise.”

Michael Barnett, Partner at Quillon Law, commented:

To many who were scarred by the consequences of the 2008 global financial crisis and the banking scandals that accompanied it, news that caps on bankers’ bonuses may be abolished will trigger a response bordering on visceral. Bankers’ bonuses were seen as emblematic of an imploding financial services industry that was fuelled by a culture based on greed and pursuit of profit at any cost. Bonuses and other financial incentives formed a major component of many claims that were brought in the Courts, whether successful or otherwise.”

“However, the pursuit of bonuses and other incentives was as much a symptom as a contributing cause of the financial crisis and ensuing banking scandals. It was first and foremost the systemic investment banking culture and regulatory infrastructure, which allowed profits and market performance to be put ahead of market and customer protection, that led to the perfect storm of unknowably complex, high-risk structured products and an environment where financial institutions’ risk and compliance functions were treated with contempt by many at the coalface. Those systemic flaws were sought to be addressed in the years following the financial crisis, not least of all with the ringfencing of investment from retail and commercial banking functions.”

“I do not see the abolition of bankers’ bonuses as risking another financial crisis, and the desire to increase the attraction of the City as a financial hub is well-motivated in principle. However, such a move comes with a stark health warning. Reintroducing what is perceived as one of the more insidious elements of a culture that no-one wants to see return carries risks that incentivising the sale of financial products will always bring.”

“The direct or obvious risk associated with incentivising sales is that sales people may pay less regard to issues such as the suitability of financial products for customers and internal compliance and risk policies that safeguard both banks and customers, where they are motivated to achieve targets by financial incentive. The more nuanced issue is that complexity in financial products masks financial risk exposure from customers not sophisticated enough to evaluate them effectively. Higher risk means potentially higher returns, and higher personal rewards if the incentives are there. The issuers of the products may be motivated to optimise risk in their favour, passing the risk on to customers with inadequate accompanying guidance.”

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