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Labour Will Not Reinstate Bankers’ Bonus Cap, Reeves Says
(Bloomberg) -- Shadow chancellor Rachel Reeves said her opposition Labour Party would not reinstate a cap on bonuses scrapped by the UK last year, as she pledged to “unashamedly champion” the country’s financial services sector if the party wins power at the next general election expected in the autumn.
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Labour’s proposals for Britain’s finance sector include becoming a “global standard-setter” for the use of artificial intelligence in the field, making the UK a hub for green finance and bolstering regional centers beyond London and Edinburgh, according to the plan seen by Bloomberg.
“Too often in the last decade, British politicians have sounded embarrassed about the sectors we excel in,” Reeves, a former Bank of England economist who is set to become the UK’s first female Chancellor of the Exchequer if Labour wins, said in a statement. “That will change under Labour.”
Labour, which leads Prime Minister Rishi Sunak’s Conservative Party by about 20 points in polls, has spent months wooing companies and the City of London as it tries end the Tories’ 14 years in power. A business conference on Thursday is the latest illustration of the example of the party’s stark break from its left-wing former leader Jeremy Corbyn.
But that transition is not without political hazard, and the argument over bankers’ bonuses — especially in the wake of the global financial crisis — is often a proxy for wider hand-wringing within Labour about whether the pursuit of power is alienating supporters and shifting the party too close to the Tories.
Reeves’s comments when Sunak’s government scrapped the cap on bonuses late last year illustrate the tension. “Today - in the midst of their cost of living crisis - the Conservatives are scrapping the cap on bankers’ bonuses,” she said in October. “It tells you everything you need to know about this government.”
Yet speaking to the BBC in a report published Wednesday, Reeves said: “The cap on bankers’ bonuses was brought in in the aftermath of the global financial crisis and that was the right thing to do to rebuild the public finances.”
“But that has gone now and we don’t have any intention of bringing that back.” Labour later confirmed her remarks.
The comments have sparked a backlash on the political left.
“It’s deeply disappointing to see Labour go from criticizing to simply aping the government’s policies,” said Fran Boait, co-executive director at Positive Money, a pressure group. “This country is crying out for change. Labour must offer something different to the current government and stop pandering to vested interests in the financial sector.”
The UK adopted the 200% of salary maximum bonus cap when it was still a member of the European Union in 2014. It was part of the bloc’s financial reforms after the economic devastation wrought by the 2008 financial crisis.
The Conservative-led coalition government of the time and former Bank of England Governor Mark Carney were opposed to the policy, which resulted in higher fixed pay and other salary innovations to get around the limit.
UK regulators had a separate plan that kept fixed pay low and had a larger variable element which paid out over a number of years. Bonuses could be recovered through “clawbacks” and “maluses” if short-term profitable trades led to long-term losses.
It was Kwasi Kwarteng, Britain’s short-lived Chancellor of the Exchequer under ex-premier Liz Truss, who first announced the UK’s plan to scrap the cap in 2022 as part of a package of measures meant to revitalize the economy. Prime Minister Rishi Sunak followed through on the plan last October.
Banking executives have argued the caps made the UK a less attractive financial center and made it harder to attract talent in London. A Bank of England study in 2022 also found the cap shifted rises from bonuses to salaries, and may even have adverse effects on risk-taking as bankers are less exposed to the long term outcomes of their decisions.
“The Labour leadership, at least for now, seem to understand that the bonus cap never really worked,” said Octavio Marenzi, chief executive officer at consultancy Opimas. “However, amongst the rank-and-file of the Labour Party, these caps remain very popular and I think it very likely that, once in power, Labour will succumb to the temptation to implement some form of cap.”
Still, Reeves was clear the party had no plan to implement the cap. Labour’s outreach to business and finance fits with a Bloomberg analysis of the UK’s electoral map this week. It found that the seats likely to decide which party enters 10 Downing Street are are older and richer, and have a bigger proportion of homeowners than the areas Labour won in 2019.
Labour’s broader financial services blueprint includes commitments to explore expanding longer-term fixed-rate mortgages and regulating the buy now, pay later sector.
It has been drawn up following a review by shadow City minister Tulip Siddiq alongside an independent advisory panel. Advisers on the panel included Abrdn Plc Chairman Douglas Flint, Legal & General Group Plc Chairman John Kingman and Prudential Plc Chair Shriti Vadera.
Under the plan, Labour said it wants to adopt a “more pragmatic and cooperative approach to working with the EU” and build upon the government’s Edinburgh Reforms, which sought to boost investment in infrastructure and make the City more competitive.
Keir Starmer’s party has pledged to make policy more predictable and improve coordination across government to address concerns among business that a lack of clarity deters investment.
The party will also host a major business conference Thursday, which 400 senior business leaders from companies including Alphabet Inc.’s Google, Shell Plc, pharma giant AstraZeneca Plc and Airbus SE are due to attend.
--With assistance from Irina Anghel.
(Updates with reaction from ninth paragraph.)
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