Could uncapped bankers’ bonuses help protect the City from Brexit?

Ministers are said to be considering getting rid of a limit on bonuses, but the important decisions are all being made in Brussels now, writes Ben Chapman

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It is difficult to think of a policy more antithetical to the “levelling up” agenda than uncapped bonuses for bankers.

Yet, at a time of immense financial hardship for millions of people, rising unemployment, a looming evictions crisis and soaring food bank use, the Treasury is reportedly considering just such a rescue package for London’s financial elite.

According to Financial Times columnist Robert Shrimsley, the government is looking into the merits of scrapping the bonus cap, brought in under an EU directive in 2015, which limits discretionary pay to two times a person’s basic salary.

It’s one of a number of rule changes said to be under consideration to take advantage of post-Brexit freedoms in the face of the EU’s increasingly robust attempts to wrest financial services business from the City of London.

Also on the table are relaxation of stock market listing rules and easing of capital requirements for insurance firms.

These are among the few levers that the government has left to pull while the EU is soon due to deliver a series of unilateral decisions on how much access to its market the UK’s financial services industry will have.

Amsterdam has already taken the top spot as Europe’s premier share-dealing hub while a significant chunk of derivatives trade has moved from London to New York because of Brexit.

But how much might the UK’s proposed deregulation help to protect financial services?

The bonus cap has not been that effective in curbing extremely high pay. It arguably just makes banks restructure how they remunerate top-earning staff rather than reducing the overall pay levels.

Incentive-based remuneration makes sense in some financial jobs. The problem has too often been that those incentives are not aligned with either a bank’s clients’ interests or those of the economy and wider society. The bonus cap has helped to mitigate this problem by reducing excessive risk-taking.

Scrapping it would be a backwards step and one that seems unlikely to achieve its purported aim of persuading firms to locate business in the UK rather than France or the Netherlands.

There are many factors that businesses consider when deciding where to locate. Plenty of research indicates that purely financial considerations such as tax rates or bonus caps come in far behind factors like access to a skilled workforce, proximity to customers and strength of the legal system.

Low regulation and low taxes are often held up as the best way to be “competitive” and “open for business”, yet London and New York remain the world’s leading banking hubs despite businesses there being subject to vast reams of financial regulation (even if some of it is ineffective).

Hong Kong has a top income tax rate of 17 per cent, less than half of that imposed on London’s hard-up traders, asset manager and brokers. By the competitiveness logic those staff should all have decamped for Asia long ago.

It is true that low-taxes and low regulation does attract capital - as Ireland, Luxembourg and the Solomon Islands will attest to.

But the kind of business, or money, that will move to wherever has the least rules to follow and tax to pay rarely tends to be the kind that invests in creating lots of jobs or research and development. It is more likely to be the kind that will move to another jurisdiction as soon as a more “competitive” offer is made.

Rules on bonuses or stock market listings are relatively inconsequential. The important decisions on the future of the UK’s financial services industry are now being made in Brussels and both sides know it.

Like a poker player with a terrible hand, the government may well try go all in, but the EU is still sitting across the table with a Royal flush (or at least three of a kind).