Partner Michael Barnett Comments on the abolition of the cap on bankers’ bonuses

September 23, 2022

Partner Michael Barnett comments on the removal of the bankers’ bonus cap and the potential effects on the finance industry.

Michael’s comments were published in the Evening StandardThe TelegraphReutersThe Independent, the Daily Mail and the Daily Express

“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. Bonuses and other financial incentives formed a major component of many claims that were brought in the Courts, whether successful or otherwise.However, the pursuit of bonuses and other incentives was as much a symptom as a contributing cause of the financial crisis and ensuing banking scandals. It was first and foremost the systemic investment banking culture and regulatory infrastructure, which allowed profits and market performance to be put ahead of market and customer protection, that led to the perfect storm of unknowably complex, high-risk structured products and an environment where financial institutions’ risk and compliance functions were treated with contempt by many at the coalface. Those systemic flaws were sought to be addressed in the years following the financial crisis, not least of all with the ringfencing of investment from retail and commercial banking functions.

I do not see the abolition of bankers’ bonuses as risking another financial crisis, and the desire to increase the attraction of the City as a financial hub is well-motivated in principle. However, such a move comes with a stark health warning. Reintroducing what is perceived as one of the more insidious elements of a culture that no-one wants to see return carries risks that incentivising the sale of financial products will always bring.

While there may now be greater transparency and wariness in relation to many of the offending financial products and trading practices that underpinned the last financial collapse, the financial world continues to engineer complex products to satisfy investors’ needs. If restrictions on bonuses and incentives are to be relaxed, it must be done with care, rather than as a glib political gesture.”