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Sunak resists pressure to remove cap on bankers’ bonuses

Chancellor Rishi Sunak is resisting pressure from investment banks to ditch the cap on bankers’ bonuses, in spite of warnings that the City of London risks losing its competitive edge to rivals such as New York.

Bankers are pushing for the cap — which sets a limit on bonuses of two times salary — to be scrapped this year as part of a series of reforms designed to make London more attractive after Brexit.

However, Sunak has resisted putting it on his agenda for now, reflecting fears that the move would be politically unpopular.

The issue was raised by one international bank chief executive at a “virtual” financial services round table on June 7, attended by Sunak, prime minister Boris Johnson and Bank of England governor Andrew Bailey, two people briefed on the event said.

The policy has been one of the most sensitive of the EU’s post-2008 financial crisis reforms and was strongly resisted by then chancellor George Osborne.

Sunak has so far steered clear of what appears to be a political elephant trap: using newfound post-Brexit regulatory freedoms to help a well-remunerated group in the City.

Officials on Monday said that while the City of London’s regulatory landscape was being reformed following the UK’s exit from the EU single market, there was no active work being carried out on scrapping the cap.

Government insiders said the issue was not a priority and that no active work was being undertaken on the issue, which is a matter for the Prudential Regulation Authority, they added.

The PRA, part of the Bank of England, has long argued higher fixed pay would reduce a management’s ability to claw back or reduce employee’s salaries, even after crises or scandals. It has also expressed concerns that paying large fixed costs such as salaries can make banks more vulnerable in stressed markets.

The BoE also declined to comment on Monday. In April it said the issue was not a priority and was focused on tweaking regulations for insurers, smaller banks and building societies.

Removing the cap on bankers’ bonuses would be seized upon by Labour as evidence that the Conservatives’ post-Brexit policies were bringing benefits to a wealthy elite, while smaller companies faced more red tape to export to the EU.

Sunak’s allies have not ruled out reconsidering to the bank bonus cap in the future, reflecting longstanding criticism of the policy in the Treasury, but it would be a bold move to scrap the rule ahead of the next election.

Osborne abandoned a possible legal challenge against the rule in 2014, saying it was unlikely to succeed, but he warned at the time the rule change would see bankers’ fixed pay rise to compensate for the lower bonus potential.

“The fact remains these are badly designed rules that are pushing up bankers’ pay not reducing it,” he said at the time. “These rules may be legal but they are entirely self-defeating.”

Sunak told the assembled bank chiefs in June he was a passionate believer in the industry and saw it as “a crown jewel in the economy”, one observer at the meeting said. “He said he was committed to keeping the UK competitive and dynamic in this field.”

This article was first published at https://www.ft.com/content/de69cef1-6788-4fe2-b00e-aabe5d303234

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The Markets Today