In a move that will be hugely controversial at a time of a deep squeeze on living standards the Chancellor told MPs “we’re going to get rid of it.”
The cap was introduced in 2014 as part of a package of measures from Brussels in the wake of the 2008 global financial crisis but has never been popular in the City.
It limited performance related bonuses to no more than twice salary levels but has been blamed for a surge in base pay in investment banks.
Mr Kwarteng told the Commons in his mini-Budget: “A strong UK economy has always depended on a strong financial services sector. We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York. All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe.
“It never capped total remuneration, so let’s not sit here and pretend otherwise. So we’re going to get rid of it. And to reaffirm the UK’s status as the world’s financial services centre, I will set out an ambitious package of regulatory reforms later in the Autumn.”
However, the move immediately triggered warnings that high risk “casino” banking practices could return to the City.
Michael Barnett, partner at Quillon Law, said: “I do not see the abolition of bankers’ bonuses as risking another financial crisis, and the desire to increase the attraction of the City as a financial hub is well-motivated in principle.
“However, such a move comes with a stark health warning. Reintroducing what is perceived as one of the more insidious elements of a culture that no-one wants to see return carries risks that incentivising the sale of financial products will always bring.”
Helen Farr, partner and employment lawyer at law firm Taylor Wessing said: "This may not be the popular move amongst those working in banks who may prefer on an individual level the certainty of a higher fixed income. Nonetheless it also gives high achievers the opportunity to earn much higher remuneration which is going to be attractive to many.
"It will be interesting to see whether the Government retains many of the safeguards recently implemented when awarding bonuses, such as the ability to demand repayment of the bonus if a banker is accused of misconduct. Some UK bankers may feel they have the worst of all worlds less fixed income whilst working in an environment that is subject to the pressures of increasing regulation."
Before the Chancellor began speaking the pound had been taking a battering on the foreign exchanges. Shortly before he stood up in the Commons sterling was down more than a cent against the dollar $1.1161, a new 37 year low, but by the end of the moring was down even further at $1.1106.
The latest slump in Britain’s currency came after the Bank of England defied market expectations by only increasing interest rates by half a percentage point rather than the 0.75% that had been priced in.
The Bank also said that Britain is probably already in recession as it slashed its forecast for thirds quarter growth to a 0.1% fall. GDP also fell by 0.1% in the second quarter of 2022.
Mr Kwarteng had already made a series of announcements before today’s mini-Budget including details of the energy bill support package for business and confirmation that April’s increase in National Insurance that will be reversed in November. He said: Taxing our way to prosperity has never worked.”