UK banks say tax on bonuses a ‘populist’ move

The City of London

The City of London

Britain’s banks say a special tax on bankers’ bonuses which is being considered by the government would be “populist” and could damage the sector and the country’s position as an industry hub.

“Windfall taxes are usually three things – they are populist, they are political and they are also penal,” Angela Knight, chief executive of the British Bankers’ Association, told BBC television yesterday (7 December).

The government said late last week it was considering a tax on banks as one of its revenue-raising options, ahead of finance minister Alistair Darling’s pre-budget report on Wednesday (9 December).

The most likely scenario is now expected to be a temporary year-long charge for banks on large bonuses, equivalent to around 50% of the total bonus paid.

A one-off tax on variable pay above a certain level and a tax on bank profits are also being considered, but would be harder to implement. A tax on banking earnings could further hamper the industry’s recovery and limit lending.

The news hit banking shares on Monday, helping to drag down the sector on a weak day for the market. At 16:18 GMT, Royal Bank of Scotland shares were down 5% at 32.9 pence, while Lloyds was down almost 4% at 53.8 pence.

Bankers said it would be difficult to impose a tax on specific individuals due to EU anti-discrimination rules, arguing any move would more likely be focused on the banks, attempting to deter them from paying any bonuses at all.

Several industry figures said it was difficult to know what would happen as it was clearly a politically charged environment with only months to go before a general election and “fat cat” banker bonuses were still highly controversial.

While a one-year hit – which could extend to the British arms of international banks based in London – might not have a lasting impact it would come on top of other factors, such as a higher rate of income tax, that risk making London unattractive as a financial centre, industry executives said.

Knight, who warned the bonus issue only affected a “small number” within the banking sector, said there was evidence of both companies and individuals already moving abroad to escape Britain’s increasingly onerous taxes.

“[We must consider] what it looks like internationally – and that is a real problem,” she said. She warned that despite public anger against the sector, seen by most voters as the cause of the credit crunch, the government should not lose sight of billions of pounds in corporation and personal taxes raised by banks.

“On the back of the banking industry sit about one million jobs – it is fundamental to the economy,” she said.

The BBA declined to elaborate on Knight’s comments, but the industry has warned that excessive regulation and taxes in the aftermath of the credit crunch could hamper the industry’s recovery and its ability to lend.

(EURACTIV with Reuters.)

EU leaders agreed in September to set binding rules on bankers' bonuses, linking the amount of cash paid to long-term performance in response to the financial turmoil which triggered the biggest recession in Europe since the 1930s (EURACTIV 17/09/09).

Back in July, the European Commission proposed a revision of the Capital Requirements Directive to "tackle perverse pay incentives" that reward excessive risk-taking (EURACTIV 14/07/09).

The European Union later brought its demands to the G20 meeting in Pittsburgh in September, saying the bonus culture in banks "must come to an end and it must come to an end in Pittsburgh" (EURACTIV 03/09/09).  

However, the bloc came back from Pittsburgh virtually empty-handed, with the G20 agreeing that the bonus culture should be "restrained" but resisting the Union's calls for specific caps on bankers' pay (EURACTIV 25/09/09). 

Guidelines from the Financial Stability Board, a policy co-ordinating arm of the G20, cover disclosure of pay levels, deferral and vesting periods on share-related pay, independent oversight and clawing back unfairly-earned pay.

  • 2010-2011: European Parliament and Council of Ministers to scrutinise Commission proposal to revise the Capital Requirements Directive, including bankers' remuneration.

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