Should we cap bankers bonuses?

The recent controversy on banker’s bonuses and salaries begs the question whether or not governments should implement regulation to cap these salaries and bonuses. Should tax payers have to fund the bail out of bankers who got rich quick and then ran out of luck? Should public sector workers have to sustain deep cuts while those at the top of private and largely state-owned banks are earning unfathomable amounts of money? The public opinion of late has been so overwhelming against this that Chief Executive Stephen Hester of the 82% state-owned bank RBS turned down his bonus of near £1 million pounds. But would capping salaries and bonuses solve the issue?

Firstly, we must address the effects a government imposed cap on salaries and bonuses of bankers would have on the financial industry. Attacking the City of London’s highest paid workers may fit public opinion at this time but whether or not it will solve any hard economic problems is questionable. The main downside of introducing more regulation on salaries and bonuses is that the City of London would look a much less attractive place to the potential financial workers of tomorrow. Nothing is stopping them from working in Wall Street or Shanghai or Singapore where their pay cheques will be under less attack from the government. London is currently the financial capital of the world but its previously unassailable position at the top is under threat as a result of political pressure from the left and even the right. If London were to lose its status as the financial centre of the world there would be great implications on the UK’s economy as a whole and significant effects on the wealth of everyone in our country. At a massive 10% of the UK’s GDP, financial services are one of Britain’s biggest exports and it is one of the few industries which we still hold a comparative advantage against our growing BRIC country competitors and so it should be embraced rather than demonised. If we are too tight on regulation of pay and bonuses, banks may become excessively stringent on their lending, or they may charge higher rates of interest. This would affect the economy negatively from the bottom up as small businesses may find it harder to get loans and therefore innovation and future growth may be restrained. Also our financial services industry is needed in order to bring in some trade surplus. Statistics from the ONS reveal that in 2010 a £36bn trade surplus in financial services helped to offset a dangerously large £98bn trade deficit in manufactured goods. By capping salaries and bonuses we are jeopardising the future competitiveness of this industry and therefore are risking the safety of the UK economy as a whole which is heavily geared around services which make up 77% GDP.

So the risks of introducing caps are evident but what are the benefits? It hardly seems fair that bankers, many of whom are blamed with causing the financial crisis of 2008, should remain unscathed with some even receiving bonuses of meteoric proportion like Barclays chief executive Bob Diamond’s recent £3 million reward. I believe that rather than capping these bonuses, adequate regulation should be put in place to ensure that these bonuses are fully taxed, so that the average tax payer is ensured that these bankers are pulling their weight. If David Cameron is to prove that he really is encouraging what he calls ‘responsible capitalism’ he will need to act fast to ensure that public support stays with him. He can do this by laying out a firm and clear policy regarding the regulation or taxing of bankers bonuses. The government needs to act sooner rather than later in order to satisfy the public as we do not want an ugly hatred of the financial sector to grow, seeing as it is one we are heavily reliant on for jobs, taxes and future prosperity. The debate on bankers bonuses will continue as long as Occupy movements still hold some public support and until ridged and clear government policy is implemented. However, the last thing we want is legislation which will choke the financial sector; we need regulation which will give the public confidence but at the same time regulation that will retain UK competitiveness.

Contributed by Charlie Harrison

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