One of the great difficulties of being a moderately well-known financial strategist is resisting the urge to climb to the top of the City’s tallest building each morning and indulge in a bout of frustrated primal screaming. Yesterday was one such morning.
Yesterday, CapX asked me if I could contribute a few thoughts on whether the limits on banker bonuses are the main reason the City of London, the beating heart of the UK’s Economy, and still (just) the financial epicentre of Europe, is in terminal decline.
It’s a good question. Has the stultifying dead hand of EU bureaucracy held back Britain’s bankers’ natural gift for risk-taking, nurturing entrepreneurship, and financial wizardry? Probably not. Over-regulation and bad decisions by the authorities are certainly evident, but there are broader reasons for the UK’s financial decline and – this is why I really need to scream – I’ve been warning about them for decades.
The cap, limiting fat cats’ bonuses to a maximum of twice their salary, was introduced following the global financial crisis. The EU and central banks felt they should punish bankers and sever the link between taking bigger risks and getting paid more. It was a meaningless gesture. Banks simply increased base salaries so they still got huge pay packets. While everyone else got poorer – bankers continued to live high on the hog.
It was all so pointless. Banks were already irrelevant by the time the rule was enacted in 2014. If you are looking for financial brilliance, economic minds of the top rank, or insightful bets, the last place you would now look for such would be in the banks of London. They have faded. They no longer take risk. They are self-satisfying bureaucracies managed to appease regulators, compliance officers, consultants, accountants, diversity scorers and other such corporate drones. Financial acumen, trading prowess, or economic brilliance will destroy any young banker’s ability to succeed in the treacle of banking groupthink.
Those who actually understand the business of capitalism and growth, have all fled the banks. They are driving their personal wealth by funding smart entrepreneurs and new businesses from hedge funds, direct lenders and private equity/debt shops. They care not a jot for bank rules.
Next week the UK will abandon the banker bonus cap. It will have precisely no effect on the economy except to give His Majesty’s Loyal Opposition another opportunity to hurl abuse at Rishi Sunak, who yet again has done exactly the wrong thing. The bonus cap is the only proposal of former chancellor Kwasi Kwarteng to have survived his swift fall into ignominy. The contrasting optics of bankers’ bonuses increasing even as the hoi polloi see their utility bills soar, their credit costs triple, inflation eat their income, and their jobs become vulnerable is just too horrible to contemplate. It’s yet another own goal benefitting Sir Keir Starmer – which might not necessarily be a bad thing given the state of the current government.
It won’t even help bankers. They are about to get exactly what they deserve. It’s been a terrible year for deals and fees, thus bonuses are set to fall in line, and declining business means bankers are being lined up for the chop. Very senior bosses will do very well out of it – awarding themselves quint-squillions for doing little more than closing branches, cutting costs, axing staff and signing off on ‘due to the high volume of calls’ messages to torture their customers.
Why is the UK’s reputation for financial excellence in such danger?
The UK’s position in the world has naturally evolved – but not positively. A century ago, as the balloon of empire began to deflate, much of global money and trade flowed through the docks, exchanges and the City of London. A financial ecosystem of lawyers, accountants, brokers, bankers, and functionaries, alongside global markets in financial services, insurance and commodities – supported by institutions like the Bank of England (to ensure its stability), the pound and the law – kept London at the centre of global finance. But all things pass.
The deals and the centre of global financial gravity is moving on from London. It is now elsewhere – markets are on your mobile phone, your laptop on the plane and your desktop where ever your office is.
That has profound implications for London. As London’s asset management industry contracts because it can’t compete on a cost basis with larger global rivals, and the banks employ fewer staff with bloated bonuses, the effects will soon be felt in London’s over-ripe housing market.
Since the global financial crisis, London has staggered on despite the distortions of quantitative easing, insanely low interest rates, massive inflation in financial assets, rising inequality and now a looming global economic recession. While US banks swiftly recovered from the shock of Lehman’s collapse in 2008, UK banks and finance remain diminished. Today, there is not a single UK financial firm competing at the top table of investment banking. Barclays are reeling from their former CEO’s dalliance with a sexual predator, and HSBC lost the plot years ago. In contrast, even Deutsche Bank, perennially the most troubled bank in Europe, is looking marginally more positive.
The reputation, influence and the relative importance of the City of London is in decline for many reasons. It is partly due to the diminished size and scope of the UK economy – in global terms the UK remains 6th largest economy (depending how you measure it), but it is of declining relative economic importance. Every year the UK’s growth is below that of other nations our share of the global economic pie declines.
The diminished size of the UK stock markets is also a factor. When I was young, the FTSE was the second most important equity index on the planet. Now I don’t bother to follow it.
UK companies are failing to reach a globally significant critical mass – they are bought and sold too young, becoming, like Nvidia, playthings of big funds. There is little nurture of firms though early growth to global dominance. Aside from a few oil majors and minors, name a single significant UK manufacturing company generating positive headlines. (Rolls Royce and JCB don’t count for oh so many reasons.) On top of all this, Brexit has closed many export markets or made others too difficult to access in terms of complexity and cost.
Yet, there is always hope. Any list of the best, most innovative universities is littered with UK institutions. When I visit Heriot-Watt up in Edinburgh, where I’m an honorary professor, I see innovation, excellence, and inventiveness – and always something that needs more money than the education budget can afford.
The UK may not be able to make the railways work on time (because of flaws in the way they are structured and managed), faces an enormous utility infrastructure rebuild cost (because of privatisation and regulatory failures), and has the most professional armed forces equipped with ancient obsolete weapons, (because of piss-poor procurement and mismanagement), but we remain an inventive and resourceful nation.
We can do better, but to be honest – we really need a national reset, and that looks unlikely to happen anytime soon.
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