In a significant policy stance, Labour's Shadow Chancellor Rachel Reeves announced at Labour's business conference in central London, that the party will not reinstate a cap on bankers' bonuses if they come into power after the next general election - slated for the end of the year. Reeves's remarks signal a departure from the regulatory measures aimed at curbing excessive risk-taking in the financial sector.
The cap on bankers' bonuses - introduced by the EU in 2014 - limited annual payouts to twice a banker's salary. However, the cap was lifted in 2023 under the leadership of then Chancellor Kwasi Kwarteng, who argued that the move would encourage global banks to create jobs, invest and pay taxes in the City of London. Kwarteng contended that the bonus limit was inflating basic salaries and pushing financial activities outside Europe.
Reeves - a former Bank of England economist - defended Labour's decision, emphasizing that the cap was initially implemented to address the aftermath of the global financial crisis and rebuild public finances. However, with the cap now removed, Labour sees no need to reinstate it. Reeves asserted that as Chancellor of the Exchequer, she would prioritise championing a successful and thriving financial services industry in the UK.
The decision not to reinstate the bonus cap is likely to provoke criticism from unions and working-class communities, who have decried the lifting of the cap as "obscene" at a time when many are grappling with the rising cost of living. Labour Leader Keir Starmer had previously criticised the policy, characterising it as a "pay rise for bankers" while public sector workers faced effective pay cuts.
The removal of the bonus cap last year triggered a wave of backlash, with concerns raised about rewarding bankers while failing to address the pressing cost-of-living challenges facing households across the UK. Labour's decision to maintain the status quo on this front reflects a broader strategy of fostering economic growth and stability within the financial services sector.
While Reeves's announcement aligns with Labour's vision for the future of the financial industry, it sets the party apart from critics who view the bonus cap as a necessary safeguard against risky financial behaviour. The debate surrounding bankers' bonuses and regulatory oversight will likely continue to shape discussions around economic policy and financial regulation in the run-up to the upcoming general election.
