So, we were told that a bonus cap would lead to banks sharply increasing fixed pay, which in turn would both increase their fixed costs significantly and thus reduce financial stability.
PwC provided a typical claim:
“If they do put caps in, this could have disastrous unintended consequences. It could result in significant increases in fixed pay,” said Jon Terry, global head of human resources consulting at PwC. “It substantially affects the flexibility of the business.”Here's what actually happened - fixed pay for most bankers didn't increase sharply, there wasn't a significant increase in banks' fixed costs and there wasn't a risk to financial stability. That's the view of the European Banking Association anyway. They did find a large increase in the fixed pay of a small number of UK bankers, but this wasn't widespread enough to affect overall fixed costs or financial stability.
This is another example those who want to reform the financial sector should remember. Finance is important to the UK economy, and it's understandable that some people worry about the impact of reform on that sector, and whether the potential costs outweigh the benefits. Fair enough, but there's also a danger in taking too much of the finance sector's propaganda at face value. The reality of the impact of the bonus cap versus what we were told would happen shows us that baseless claims continue to be made in very strong terms (i.e. potential threat to financial stability). Remember that next time.