Bankers’ bonuses? Motivate fintech entrepreneurs and investors instead

Government borrowing is rising to finance high-rate tax cuts under a new UK growth plan aimed at stimulating investment. But targeting a strong fintech sector can be a huge economic multiplier.

Image source: Kwasi Kwarteng

You may have noticed that the UK has a bold new plan for growth. But the market – and the International Monetary Fund – haven’t liked it much.

Outlined last week by Finance Minister Kwasi Kwarteng, the most eye-catching policy in a now infamous ‘mini-budget’, at least in a tabloid/nostalgic way, was the proposed removal of a cap on bankers’ bonuses that has been in place since 2014.

While there is some logic to the move, more policies aimed at stimulating the entrepreneurial part of the City of London, and the UK’s financial sector in general, would have a greater impact and prove less divisive.

Stimulating and bringing forward friendly regulations aimed at the UK’s world-leading fintech sector would be a better policy to boost growth.

If the cap fits

The cap on bankers’ bonuses, which limits payouts to twice bankers’ salaries, was brought in to quell public anger over a piecemeal lack of adequate retribution, not to mention jail time, against bankers for their part in the 2008 financial crisis. Admittedly, six years after fact.

It sought to curb a widespread public view of excessive risk-taking by banks, synonymous with the film The Wolf of Wall Street which also hit theaters in 2014.

Kwarteng believes that Britain is woefully undersupplied with economic growth-enhancing forces that can expand the economic pie for all and help plug holes in the increasingly strained public finances.

“We want businesses to invest in the UK, we want the brightest and the best to work here and we want better living standards for everyone,” Kwarteng said.

“Economic growth is not an academic concept without connection to the real world. That means more jobs, higher wages and more money to fund public services, such as schools and the NHS. This will not happen overnight, but the tax cuts and reforms I have announced today – the biggest package in generations – send a clear signal that growth is our priority, Kwarteng said.

A round of new investment from global banks, driven by the lifting of the cap and the ability to pay bonuses to their hearts, will boost London’s financial sector and enable it to stay ahead of Paris, Frankfurt and even New York, it believes.

The argument for removing the cap is this. Since the tariff was introduced, banks have had to pay higher wages to attract talent due to lower potential bonuses than in other financial centres.

This means a higher cost base that is less geared towards performance, which means a higher risk to the business in downturns. By reversing the rate, the banks will be incentivized to offer star performers higher returns, as well as not be forced to absorb higher costs when the banks are not making money.

Ending the era of a cap on bank bonuses was not the only policy unveiled by the new chancellor. He also announced policies to tackle energy costs to bring down inflation, canceled a planned rise in corporate tax, and cut the basic income tax rate to 19 percent a year earlier than planned. He also relaxed stamp duty rules to stimulate the housing market.

The best news for fintech and other entrepreneurial industries was a series of measures to strengthen the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

Kwarteng said the EIS and Venture Capital Trust (VCT) schemes would be extended beyond their original 2025 sunset clause and SEIS caps would be increased.

From April 2023, companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase, while the gross asset limit will be increased to £350,000 and the trade-based eligibility criteria extended from two to three years. The rate for investors will rise to £200,000.

Of course, in economies like the UK – which are nominally called “advanced” by economists, growth does not come easily. It depends on a wide variety of influences caused by long-term investments and regulations that tend to intensify over time.

Quick fixes and headline guidelines are unlikely to help in the short term. It is true that even an accelerating fintech sector will also struggle to boost growth in the UK which, taken together, is only a small part of the overall economy.

However, scaling the UK’s fintech sector will have profound effects for the better on the availability of capital, access to cutting-edge technology skills and the nurturing of innovation clusters.