The banker bonus cap was a bad idea

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

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In today’s newsletter:

Why the banker bonus debate is a waste of time

There has been no shortage of finger-pointing for the UK’s financial sector woes — an outdated listings regime, onerous “related-party transactions” rules and even bad press.

On Tuesday, the government took aim at another scapegoat for the City of London’s lack of global competitiveness: bonus caps.

The UK has said it will scrap a cap that limits bankers’ bonuses to twice their base pay, a rule imposed by the EU in 2014 in order to discourage finance workers from taking huge risks in light of the 2008-09 financial crisis.

Bonus caps tend to push base salaries higher. For example, a banker who averaged £3mn a year before the cap, spread between a £500,000 salary and £2.5mn bonus, would demand a £1mn salary to keep their earnings potential roughly in line with what it was before.

Doing away with the cap, lawmakers argue, will help bring down the fixed costs of employing a banker in London as opposed to New York and therefore boost the competitiveness of the UK’s financial services industry.

On the other end of things, bringing back the era of unlimited bonuses for well-to-do bankers isn’t exactly a good look against the backdrop of a cost of living crisis. The decision to abolish the cap “at a time when families are struggling with the cost of living and mortgages are rising . . . tells you everything you need to know about the priorities of this out-of-touch Conservative government,” said Darren Jones, the Labour party’s shadow chief secretary to the Treasury.

Rather than picking sides, however, DD would like to offer some perspective: the bonus caps never made sense to begin with.

The notion that bonuses fuelled excessive risk-taking during the financial crisis, or that the cap did anything to discourage such behaviour, is subject to debate. As the FT’s Helen Thomas has noted: A Bank of England study suggested the cap plus other changes could have curbed excessive risk-taking. The IMF has worried it can deter “good” risk taking, exacerbating under-investment. Other studies have found negligible effect.

Nor has the cap done much to curb banker pay.

“Most investment bankers like the bonus cap . . . They just can’t openly admit it,” as former Bank of America veteran Craig Coben has written for Alphaville. When the new rules took effect in 2014, City lenders simply swapped out big bonuses for “role-based allowances” — giving senior bankers an extra boost upfront without needing the performance to back it up.

For now, as the dealmaking pipeline has only just begun to thaw, removing the cap might not give bankers the immediate windfall that critics expect as lenders grapple with poor investment banking performance (we’re looking at you, Barclays).

Death CAB for London

It has been a dismal year for the London IPO market. So when the fintech group CAB Payments raised about £300mn in a UK listing in July, it came as a rare bright spot.

Alas, it was short lived. On Tuesday, shares in CAB plunged 72 per cent after the company warned on its profits.

After previously going public at a market capitalisation of £851mn, the group is now worth just £155mn — a real “CABtastrophe”, Alphaville notes.

CAB specialises in helping businesses make payments to “hard-to-reach markets” and its largest investor is Africa-focused private equity group Helios Investment Partners.

A steep drop in the Nigerian naira as well as recent central bank intervention in the central African franc and the west African franc hit both profit margins and the volume of transactions, the company said.

Its chief executive Bhairav Trivedi told the FT that intervention by central banks was “outside management’s control” and could not have been foreseen.

Still, it’s “an absolute disaster” for a London market trying to attract more companies, one banker said. It also comes after soda ash producer WE Soda pulled its proposed $7.5bn IPO this year.

A tumultuous market has cooled hopes of an IPO comeback for now. A slate of US listings including the likes of Arm, Instacart and Birkenstock has underperformed rather than spurred a revival.

The disaster raises questions about everyone who advised on the deal. Barclays and JPMorgan Chase were the lead advisers on the IPO while UK brokers Canaccord Genuity, Liberum Capital and Peel Hunt were joint bookrunners.

The last hope for Europe’s IPO market this year is private equity giant CVC, which must weigh up its long-term plans and strong fundraising against a cloudy outlook and the struggles of its rivals.

DD is watching the situation closely.

Job moves

• Former Credit Suisse chief operating officer Francesca McDonagh has agreed to join a private equity-backed German fund group Universal Investment as chief executive, according to people with knowledge of the appointment.

• Former Conservative chair Sir Brandon Lewis has taken a job advising LetterOne, the London-based investment company set up and still partly owned by sanctioned Russian oligarchs Mikhail Fridman and Petr Aven.

• Coinbase co-founder Fred Ehrsam is stepping down as managing partner of Paradigm, the venture capital firm he founded with former Sequoia Capital partner Matt Huang that backed cryptocurrency start-ups including FTX. Ehrsam will remain on as a general partner.

• Freshfields has named Alastair Chapman, managing partner of its antitrust, competition and trade unit, as head of the practice group. He replaces Thomas Janssens, who will take on a new role within the firm.

• Antares Capital has made three senior hires on its liquid credit team: Alcentra’s Rob Davis, HPS Partners’ Amy Ecker and LoansIntel’s Jonathan Rogers.

Smart reads

How bad are PE valuations, really? Private markets might not be as moribund as investors feared. But they best not be too optimistic, Alphaville writes.

Trouble in paradise Hedge fund billionaire John Paulson’s Puerto Rican property portfolio has weathered natural disasters and a global pandemic. But his various legal battles could be its undoing, Bloomberg reports.

The new China In an age of disappearing politicians and fleeing tech entrepreneurs, The New Yorker’s Evan Osnos analyses what the dark clouds forming over China mean for the rest of the world.

News round-up

Kering sales slump casts doubt over Gucci reboot (FT)

Gunvor chief looks to keep control in family after end of Adnoc talks (FT)

Goldman, Citi drop off Investcorp IPO over regulatory grey area (Bloomberg)

UniCredit to set aside €1.1bn to avoid paying one-off windfall tax (FT)

Hermès sales growth slows in third quarter (FT)

Italian furniture group to buy UK sofa retailer ScS in £100mn deal (FT)