Bankers’ bonuses are roaring back. Will we live to regret it?

US banks are moving to take advantage of the post-Brexit decision to scrap EU rules limiting bankers’ bonuses to twice their basic salary, writes James Moore. With their UK peers set to follow suit, how worried should we be?

The City’s towers of finance where bonus culture looks set to make a comeback (PA)

The bonus boys and girls look set to make a comeback in the City of London.

Morgan Stanley has become the latest US bank operating in the capital’s financial sector to take advantage of the UK’s post-Brexit scrapping of the bankers’ bonus cap – one of the few things to survive the disastrous premiership of Liz Truss.

Brought in by the EU after the financial crisis in 2008, the cap limited bonus payouts to no more than a banker’s basic salary, twice that with shareholder approval.

The stated aim of the policy was to reduce crazy risk-taking behaviour by bankers who earn their crust playing dice in the financial casino. This, it was said, would make banks safer. Unofficially, Europe’s politicians saw that the public’s appetite for a crackdown was very high, and this avowedly popular – but also populist – measure played directly into that.

The Cameron administration opposed it, as did the Bank of England. They argued that banks would inevitably respond by increasing bankers’ basic pay, which they would be powerless to cut if they needed flexibility during financial squalls. This argument did not wash with the public. People were largely under the impression that the measure would clip bankers’ wings. Understandably, it was felt this was no less than they deserved.

But did it really do that? Some bankers quietly admitted that they rather liked having the much bigger guaranteed salaries that resulted. Top financial “risk takers” – otherwise known as rain makers – will always find a way to make bank regardless of where they work.

In practical terms, the end of the cap will not change things overnight. Partly that is because to shift from today’s remuneration model to something more like the previous one, in which basic salaries were relatively low coupled with very high bonus potential, will take time.

However, the ability to offer higher bonuses than their rivals will clearly be to the advantage of the American banks that have taken this step. Money motivates people, especially in this milleu. Dangle an unlimited bonus in front of a banker, and they will most likely go for it even if there are conditions attached.

Life is going to get difficult for European banks, stuck with the old regime because of their domicile. But what of the British contingent? Barclays, HSBC and Lloyds have sought, and secured, shareholder approval to scrap the cap. NatWest has moved from 100 per cent of salary to 200 per cent, bringing it into line with the others. I suspect that they will all ultimately follow the American lead. So yes, when the City has a big year, and this should be a big one given the uptick in dealmaking, mega-payouts will increasingly make their presence felt.

Having the City of London’s top bankers with their snouts in the trough at a time when many families are struggling and food bank use is at a record high leaves a sour taste, to say the least. The TUC, pointing to figures showing that the annual bonus for pool workers in the finance and insurance sector was £18.7bn even with the cap in 2022, has called for “restraint” on the part of the City’s high priests of finance.

“I urge bank leaders today to do the right thing ... the bankers’ bonus cap was put in place to stop the excessive risk-taking and greed we saw in the run up to the financial crisis. We cannot afford a return to the bonus culture which crashed our economy,” said general secretary Paul Nowak.

Trouble is, asking the City to show restraint is easier said than done. Bankers are always going to make bank. It’s why they go into the trade and why they flog their guts out to reach the top when they get there. The rewards are dizzying, but the hours are quite brutal and these are far from easy places to work.

Ultimately, what we have here is not a debate over the size of pay packets, but over their structure. The Bank of England was opposed to the cap because it preferred banks to have the flexibility to pay less in bad years. Some of the rules designed to deter excessive risk taking – such as requiring that a big chunk of bonuses are paid in shares subject to clawback from bankers who misbehave – also remain in place. To my mind, the latter is actually a better rule than the cap ever was. You can’t take back a bad banker’s salary in the same way that you can repossess their restricted shares.

For all the sound and fury when a UK bank inevitably follows the US lead, an incoming Labour government, keen to be seen as business friendly, won’t reverse course on this. It needs the City to act as an engine of growth. It needs more growth full stop. In theory this could help.

But is it a sensible way to proceed? We’ll only find out if, or when, the financial proverbial hits the fan again. Let’s be honest: it’s when. Make no mistake this decision will be put to the test one day.