City banks exempt from bonus ban

MAJOR BRITISH banks have been ordered to pay less than a third of the billions of pounds in cash in staff bonuses due at year end under new European Union rules.

But the majority of institutions in the City of London have been exempted from the rules, following a decision by the UK’s Financial Services Authority.

The Committee of European Banking Supervisors decided bankers in the EU should receive 20 to 30 per cent of their bonuses up-front in cash, with the rest deferred or held in shares for at least three years, but individual EU member state regulators were given freedom to decide on the exact application of the rules in their territories.

The FSA has now decided that the majority of the 2,700 institutions it regulates, including smaller banks, hedge funds and asset managers, should not be covered by the restrictions, bar the biggest banks, such as Barclays. The new rules come into force on January. The FSA decision will anger those who have been calling for curbs on the bonuses to staff in the big City firms.

Deputy prime minister Nick Clegg called for restraint on Thursday from banks, urging them to hold onto money to repair their own balance sheets, so that they may increase leading to customers.

However, the FSA’s decision means the major banks will not be able to offer guaranteed bonuses beyond one year, while it will also have powers to claw back payments to senior executives if they are later found to have taken unacceptable risks.

Meanwhile, the Bank of England has said UK banks should restrain bonuses and dividends to build up a cushion against financial upheavals in the euro zone and other risks: “The United Kingdom is only partially insulated given the interconnectedness of European financial systems and the importance of their stability to global capital markets.

“The main credit risks to UK banks stem from the possibility of losses on lending to euro-area households and companies, should sovereign and banking concerns spillover to weaker-than-expected growth in the euro area. Heightened sovereign risk in Europe could also expose UK banks to funding risks and the UK economy to the withdrawal of lending by foreign bank,” it went on.

Investors, faced with low rates in the UK, are now looking elsewhere for higher returns, posing dangers that too many risks will be taken.

China and Turkey are currently seen as attractive, but the bank warned that an excess of capital could create the type of bubbles that have already caused difficulties elsewhere.

Meanwhile, the Bank of England said that it had agreed to lend £10 billion (€11.7 billion) to the European Central Bank to help provide sterling liquidity to the Central Bank of Ireland.