Why is the banker bonus cap being scrapped? 

Welcome to Wednesday’s Early Edition from i.

It is just over a year since Kwasi Kwarteng unveiled his disastrous mini-budget, the one that sent markets spiralling, pushed mortgage costs up and caused political chaos. Many would have, sensibly, thought that any remnants of that plan had well and truly evaporated. But they would be wrong. One little detail failed to fully extinguish in the bonfire and is back to stir up controversy yet again – and that is scrapping the cap on banker bonuses. Those with much longer memories will know that the policy came into effect in 2014 off the back of an EU law passed in the wake of the 2008 global financial crisis. The-then Chancellor George Osborne gave up trying to thwart it with legal challenges, but did so with this warning: “The fact remains these are badly designed rules that are pushing up bankers’ pay not reducing it. These rules may be legal but they are entirely self-defeating, so we need to find another way to end rewards for failure in our banks.” A quick search on banker salaries will tell you that those at the top of their game in this country are not suffering. In spring last year, British bankers were celebrating “particularly obscene” bonuses despite the cap being in place. In 2019, the European Banking Authority found that more than 3,500 bankers in the UK earned more than €1m-a-year. So why scrap the cap now? We’ll look at what it means, after the headlines.

 Today’s news, and why it matters

 Extreme rainfall and flooding is becoming more common but the UK is unprepared to deal with this type of weather, climate scientists have warned. “We’re not adapted to these events, because otherwise people [would] not die. You don’t have to die in a storm like this,” one climate scientist told i.

More than half a million universal credit claimants with children under 12 face benefit cuts unless they ramp up efforts to get into work under changes being implemented today. Jeremy Hunt announced changes to rules for parents on universal credit in the Spring Budget as part of plans to get out-of-work parents into employment.

The future of the state pension triple lock hangs in the balance as Jeremy Hunt considers limiting the size of the increase in pension payments to save nearly £1bn. Opposition politicians and campaigners for the elderly warned the Government not to tweak the rules of the policy by using a lower calculation of earnings rises than usual.

Most people believe governments should step in to ban the development of artificial intelligence with superhuman abilities, a new poll has revealed ahead of Rishi Sunak’s AI Safety Summit. The PM has said he wants to harness the benefits of ultra-powerful AI while also building “guardrails” to stop it running out of control.

The British-based families whose relatives were kidnapped or killed by Hamas have described their pain, as the militant group releases some of the hostages sporadically. Moments before Jordan Bibas, 34, was taken hostage by Hamas militants, he texted his parents and his sister to say, “I love you”. But his sister, Ofri Bibas Levi, was never able to text him back as she was too afraid his phone would make a sound.

Banker bonuses – three key questions:

What was the rule and why was it brought in? The bonus cap limits bankers’ annual payouts to twice their salary. Money expert Paul Lewis explained it here: “How bankers’ bonuses work. Your salary £1 million a year. Here are your targets. If you hit them you will get bonus capped at £2m. If you miss them all you will still get £1m. From 31 Oct cap scrapped so £2m can be any amount.” He added: “Change needed to make City attractive place to work. Apparently bankers only work to their best if they are paid more than three times their actual salary.” The rule was brought in after the major financial crash of 2008 in an attempt to reduce incentives for bankers to take excessive risks and restore more trust in the sector. However its critics argued that without a cap on pay, banks could offer higher fixed salaries, and therefore a relatively bigger bonus. At the time, a senior legal advisor at the European court of justice rejected the British government’s argument that the cap would be illegal, saying: “Fixing the ratio of variable remuneration to basic salaries does not equate to a ‘cap on bankers bonuses’, or fixing the level of pay, because there is no limit imposed on the basic salaries that the bonuses are pegged against.”

What will change? Scrapping the bonus cap has previously been described as a “clear Brexit dividend” now that Britain is free of EU rules, but the chief motivation, according to the banking sector, is that removing it will make the financial sector more internationally competitive. The Bank of England’s Prudential Regulation Authority said: “The bonus cap has been identified as a factor in limiting labour mobility,” and claimed that the current system was causing salaries to be driven up in a manner not linked to their performance within the company. Last year, Kwasi Kwarteng stated the bonus limit was pushing up basic salaries and driving activity outside Europe and that his plans would “unleash the power of the private sector”. The the Financial Conduct Authority said the changes would “help remove unintended consequences of the bonus cap” by giving firms flexibility to cut pay in response to poor performance or misconduct. “The removal of the bonus cap gives firms the freedom to restructure their pay over time, within the framework of the regulators’ rules on variable remuneration which aim to better align remuneration with prudent risk-taking,” it said.

What do critics say? Removing the cap at a time when the cost-of-living crisis is still biting hard has made the policy seem tone deaf in some quarters. Darren Jones, Labour’s shadow chief secretary to the Treasury, said: “At a time when families are struggling with the cost of living and mortgages are rising, this decision tells you everything you need to know about the priorities of this out of touch Conservative Government.” Paul Nowak, general secretary of the TUC, said it was “an insult to working people” and said “city financiers are already enjoying bumper bonuses”. Think tank the High Pay Centre also argued that scrapping the bonus cap will only benefit a handful of the UK’s “super rich”. When the idea to scrap it was first raised last year, Sir Keir Starmer said the plan amounted to “pay rises for bankers, pay cuts for district nurses”. And Andrew Sentance, a former member of the Bank of England’s Monetary Policy Committee, warned at the time the measure would send “a rather confused signal when people are being squeezed in terms of the cost of living and the government is trying to encourage pay restraint in the public sector”.

Around the world

 The Gaza Strip risks becoming “a kind of Somalia” unless Israel and the international community can agree a plan to rebuild the Palestinian enclave once Hamas has been removed, a former senior Israeli intelligence official has warned. Sima Shine, a former top analyst in Israel’s elite Mossad espionage agency, said that while the Israeli government is being presented with scenarios for a post-war “endgame” in Gaza there are “big question marks” over whether there is the international appetite to make any such schemes work.

An elderly hostage who was released on Monday night has spoken of the “hell” she endured after she was kidnapped and forced to walk through Hamas‘s “spiderweb” of underground tunnels in Gaza. Yocheved Lifschitz, 85, has shed the first insight into how at least some of the captives are being treated by Hamas.

One person has died and four are missing after a British cargo ship sank off the German coast following a collision with another vessel, as a team of divers were deployed to search for signs of life in the wreckage. The British-flagged Verity collided with the Polish-owned cargo ship Polesie at at around 4am UK time on Tuesday.

California regulators have suspended the licence of a self-driving taxi service known as “robotaxis” after ruling that they pose a danger to the public. The suspension comes after a series of incidents and complaints from police, who said the cars had driven into active crime scenes.

Listening to music might be an effective way to reduce pain, according to a new study. Researchers in Canada found songs that produce tingling or goosebumps were linked with lower pain intensity, providing the kind of relief seen with some over the counter medication.

 Watch out for…

 Rishi Sunak, who today marks one year in office, but also faces some tough questions about domestic and foreign policy at PMQs.  

 Thoughts for the day

 One year of Rishi Sunak and the verdict is… dismal. His biggest success is not being Liz Truss. His best quality is failure, writes Ian Dunt.

How to guard against ‘compassion fatigue’ when the news is so awful. Our attention has been pulled from one major international crisis to the next, says Fiona Mountford.

A ‘bin tax’ for holiday home owners? About time. Holiday homes take housing away from local people, don’t boost the local economy, and strain services. Now some councils have had enough, reveals Vicky Spratt.

Culture Break

 Is Taylor Swift a secret spy novelist? Why fans think she’s Elly Conway, the mystery author behind Argylle. Rumours are swirling that the pop star could be the previously unknown author behind a novel series that has sparked a blockbuster film.

The Big Read

 Struggling to connect with others? You might have diaphobia – but it can be cured. You probably haven’t heard of diaphobia, but it’s likely that you’re guilty of it, says Sophie Morris.

Sport

 Super Bowl in London gets Mayor’s backing as NFL boss admits ‘it has been discussed’. The Vince Lombardi Trophy has never left the United States, but a spokesperson for the Mayor says London is ‘the sporting capital of the world’, reports James Gray.

Something to brighten your day

 I hate the gym so got fit using only stairs – this is how to get a full body workout for free. Could taking the stairs – whether in a shopping centre, an office block, or at home – really consitute proper exercise, or was I kidding myself? Kasia Delgado asked personal trainer Ray Gabriel-Anyassor to show her what to do.