EU banker pay cap 'threatens thousands of British jobs'

By Kamal Ahmed

Michael Fallon, the enterprise minister, said that the Treasury will demand at meetings in Brussels this week that the proposals are flexible enough to allow UK banks and foreign banks based in London to pay competitive rates.

He said that although the new regulations on remuneration would only affect the highest paid, it could ultimately mean whole banking divisions being moved away from the UK as banks seek to operate in the more flexible markets of Asia and the US.

“There is a very special risk we have here in the UK, which does not apply to any other European country, which is that we have major international banks that are based in London but have branches all over the world,” Mr Fallon said.

“We need to make sure that any regulation that applies across Europe is flexible enough to allow those banks to continue to compete from London.”

At a meeting of European finance ministers this week, George Osborne is expected to call for a flexible application of the cap so that banks that already defer bonuses and allow for “claw-backs” are able to increase the ratio of bonuses to salaries.

The EU caused a storm of protest from the banking sector last week when it published new rules saying that banks would not be allowed to pay bonuses any higher than one times salary.

Banks could raise the figure to two times salary only after a special shareholder vote. City institutions complain that salaries will therefore have to rise to maintain their competitiveness. Such “fixed costs” increase risk, they argue, because it is not possible to claw back costs if future performance slumps.

“The threat is not to the well paid banker, the threat is to the hundreds of thousands of ordinary banking jobs in Britain if these big international banks are forced to relocate,” Mr Fallon said.

“These are jobs from places as far apart as Poole, Birmingham, Halifax and Edinburgh.

“We are not giving up on this, we are still fighting for more flexibility and we’ll be doing that at the Ecofin meeting this week. Treasury ministers will be there to ensure we retain the flexibility we need to allow banks to continue to compete from the UK.”

Senior Whitehall sources have also revealed that Vince Cable, the Business Secretary, is also unconvinced by the need for a cap. Figures close to Mr Cable said the “one size fits all” approach was a problem and that banks in the UK and their shareholders had already done a lot to bring the level of banking remuneration down.

Treasury sources have pointed out that because the bonus cap is only one part of an EU document that includes new rules on capital and liquidity requirements as well as macro-prudential controls – many of which are supported by the UK – that there was “a need to be practical”.

Officials are going through the document this weekend to see what concessions can be demanded on remuneration this week.

On Sunday, Switzerland will vote on plans to enforce new rules on executive remuneration which could affect British business that relocated there to avoid UK taxes and regulation.

Shareholders will be given the right to hold binding votes on compensation of executives and directors. It could also see the banning of “golden hellos” and “golden goodbyes”.