Why it’s right to scrap the bankers’ bonus cap

Scrapping the bankers’ bonus cap will annoy Brussels, says Matthew Lynn. And while we’re at it, he says, we may as well get rid of a load of other EU rules too.

It is unlikely to be a popular move. At a time when the cost of living crisis is squeezing living standards on a scale unprecedented in more than 30 years, when inflation is close to 10%, and when many people are struggling to make ends meet, lifting the controls on the bonuses banks are allowed to pay their staff, as new chancellor Kwasi Kwarteng is expected to do, is going to seem like a provocative move.

It is still the right one, however, and will give an important signal that the Truss government is willing to make the right decisions even if it means a few bad headlines and some outrage on Twitter.

Why the bankers’ bonus cap never made sense

The bankers’ bonus cap never made much sense and it has certainly long passed its useful life. All of the main City banks have already learned to live with it, mainly by paying higher basic salaries, and there is not much sign of the banks taking excessive risks anyway. If anything, we need them to take slightly more risk, especially when it comes to lending to companies for productive investment. It is an out-of-date solution to a problem that never really existed.

It is not likely to be popular politically, of course. The EU will no doubt be annoyed that one of its regulations is getting scrapped, and there will probably be lots of angry speeches in the European Parliament about how the continent can’t let itself be put at risk by unregulated, greedy financiers and traders on the other side of the English Channel. But there won’t be much it can do about it.

The EU has been busily trying to destroy the City for the last six years, and hasn’t made much progress. It is unlikely that it will be any more successful now than it has been in the past. Scrapping the cap won’t transform the City. But it will be one less rule that a global financial institution has to comply with if it chooses to base itself in London rather than somewhere else, and at the margin that will help. It will also be a symbol that the UK is in favour of finance, not hostile to it.

Time to rip up some more rules

But why stop there? There are a whole raft of EU rules that could be ripped up, and which would help the City to win new markets. Such as?

For starters, we could rip up the cumbersome Solvency II regulations that require the huge insurance industry to keep vast quantities of money tied up in low-return, low-performance investments rather than in infrastructure or new businesses that might help the long-term growth of the country. It doesn’t help investors very much, it certainly doesn’t help the economy, and scrapping the rules would free up a vast amount of capital that could be put to work as well as helping to improve the profitability of the industry.

Next, scrap MiFID II, which has imposed a vast array of rules and regulations on every kind of financial instrument. There is very little evidence that it has made the financial markets safer, or more efficient, or better at either raising or allocating capital. But there is plenty of evidence that it has vastly increased regulatory and compliance costs and made it a lot harder for new players to break into the market.

The EU’s increasingly bizarre rules covering environmental, social and governance issues (ESG) could be next for the chop. It is not necessary for every form of fund to come with an ESG rating – it is just legislative virtue-signalling.

Bring in the robots

Finally, the EU has clamped down hard on artificial intelligence. But finance is one of the areas where machine learning can be most creatively deployed. From robo-advisers, to computerised fund management, to trading driven by algorithms, machines are often better at finance than humans, partly because they are so fast, and partly because all the biases and emotions that make us poor investors can be programmed out. It will be very hard to develop any of that under EU legislation.

It is crazy that two years after leaving the EU so much of its rule book is still in place. We should have ripped it up straight after we left. It might not win any votes, at least outside a very small area of London, but getting rid of the bonus cap is a step in the right direction.

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