The City of London will be able to compete better with Paris and Frankfurt for jobs and investment after the cap on banker bonuses is scrapped, Kwasi Kwarteng said as he mounted a robust defence of the controversial move.
Laying out his case for scrapping the cap, which was introduced by Brussels in 2014 in response to the financial crisis and limits a banker's annual bonus to twice their salary, Kwasi Kwarteng argued that a strong UK economy is reliant on a thriving financial services sector.
He said: "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. So we’re going to get rid of it".
Rival EU cities such as Paris have been rolling out the red carpet for bank chiefs and powerful Wall Street financiers since the Brexit vote, raising concerns among some that London could lose its status as Europe's finance hub as talent moves overseas.
JP Morgan, Goldman Sachs, Morgan Stanley and Bank of America have all ramped up their presence in the French capital in recent years, while the European Banking Authority moved from London to Paris in 2019.
Michael Spencer, a City tycoon and former Tory party treasurer, said that scrapping the bonus cap will make London more attractive as a place to work than the European Union. He added: "We want the best bankers to work in the UK".
There has been speculation that ministers would ditch the EU-era rule ever since Brexit, following years of tension between authorities in Britain and the continent over bank pay.
In 2014 Andrew Bailey, the former head of the Prudential Regulation Authority who is now Governor of the Bank of England, called the cap “the wrong policy” and warned it risked unintended consequences for the City.
Critics of the cap have long argued that banks have just got around it by increasing base salaries for workers, which they are paid regardless of how well they have performed. This increases the fixed costs of hiring a banker in London and means it is harder to reward success. Mr Kwarteng echoed that sentiment on Friday.
The decision is highly controversial and was met with anger by left-wing activists and critics of the City.
Michael Barnett, a partner at Quillon Law who advised on cases involving bank scandals during the 2008 crash, said banker bonuses are seen as emblematic of a sector "fuelled by a culture based on greed".
He said: "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."
Fran Boait, executive director of campaign group Positive Money, said: "This should have been a cost of living budget, but instead it’s a bankers’ budget."
However, investment bankers are unlikely to be expecting huge bonus payouts this year despite the decision. The value of UK merger and takeover deals is down 39pc on last year, according to Refinitiv, and at its lowest since 2018.
Most bankers enjoyed large paypackets through the Covid crisis after market volatility triggered a trading boom and clients raised debt and equity.
The five biggest Wall Street banks disclosed that at least 119 people in their UK and European businesses made over £4.4m last year, according to Bloomberg data, up from 78 in 2019.
The Treasury said that the finance industry will be "at the heart of the government’s programme for driving growth across the whole economy" with an "ambitious deregulatory package" to be unveiled later this autumn.