Foreign Banks Warn Over Bonus Cap Exodus

By Mark Kleinman, City Editor

Some of the biggest foreign banks operating in the UK have warned London's main banking watchdog that a European cap on bonuses would lead to an overseas exodus of their senior managers.

Sky News understands that a number of US and other banks headquartered outside the European Union have warned the Prudential Regulation Authority (PRA) that the imposition of an enforced pay ratio has already prompted senior executives to demand a relocation away from London.

Officials say that the warnings have prompted serious alarm at the PRA, which is concerned that major banks could be denuded of much of the senior management expertise required to operate under the regulator's aegis.

News of the overseas banks' warnings comes just days after Sky News revealed that the Chancellor, George Osborne, was taking legal action at the European Court of Justice to try to overturn the bonus cap.

Despite the challenge, banks operating in London will be forced to adopt the new rules from next year pending its outcome.

The PRA has already made clear its opposition to moves to restrict bonuses to - at most - 200% of base salaries, arguing that it risks increasing instability in the banking system by driving up fixed costs.

British-based lenders have also criticised the cap, saying that they will have little choice but to inflate basic pay if they are to compete with rivals unaffected by the new restrictions.

George Osborne is taking legal action to try to overturn the bonus cap

Andrew Bailey, the PRA's chief executive, said earlier this year that the cap would "reduce the discipline in the system but it won't reduce overall remuneration" and warned that it "will institute an unhelpful culture of banks spending their time finding ways to get around the rules".

Without a successful legal challenge, UK regulators have little scope to overturn or ignore the cap despite the fact that regulators and many Westminster-based politicians agree that it will be potentially counter-productive.

A PRA consultation paper on the latest European Capital Requirements Directive will be published in the coming weeks.

Douglas Flint, the chairman of HSBC, has paved the way for Europe's biggest lender to increase salaries in time for the introduction of the new ceiling.

Last week, a Treasury spokesman said the new rules would "make banks themselves riskier rather than safer [and] may undermine responsibility in the banking system rather than promote it".

"Regulation of pay in this manner goes beyond what is permitted in the EU Treaty. That's why we are challenging these rules in the European Court, to ensure the legislation respects the EU Treaty and actually achieves what it's meant to: a more stable banking system that serves the economy, businesses and consumers."

The PRA declined to comment on its discussions with overseas banks on the issue.

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