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UK to Water Down Bank Bonus Rules

George Osborne is set to water down plans to force disclosure of bank bonus payments above £1 million, in a move that will delight the City but sets up a political clash with business secretary Vince Cable and the Liberal Democrats.

Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.
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Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.

The chancellor has been lobbied by senior bankers who claim that if Britain introduces more pay transparency unilaterally it could put the City at a disadvantage and lead to some banks shifting activity to New York or other financial centres.

Mr Osborne shares those concerns, as does Sir David Walker, author of an influential report last year on City pay disclosure, who argues in the Financial Times that the government “would be mistaken” to go it alone.

Mr Osborne’s change of heart will delight the major banks, which have mounted a fierce lobbying operation to persuade him to shelve plans for more transparency ahead of a politically charged bonus season in February and March.

Sir David’s proposals for disclosure of remuneration above £1 million for bank employees, but not board members, were put on the statute book by the last Labour government. Mr Osborne has been dragging his feet in putting them into practice.

Treasury officials have insisted for weeks that the legal instrument to implement Sir David’s report – requiring high-end remuneration above £1 million to be listed by banks in pay bands – would be laid “soon”.

But senior Treasury officials have told the FT that Mr Osborne is no longer committed to implementing the plan as originally envisaged because of the lack of international agreement on transparency.

“The government is obviously interested in Sir David’s views,” said one official. “When he wrote his report in 2009 he envisaged his plan would be part of an international consensus. Doing this in the absence of international co-ordination could leave the UK exposed.”

The banks argue that listing pay in bands above £1 million could lead to some banks paying their top traders through other financial centres – regulatory arbitrage – and could lead to pay inflation as staff look enviously at what colleagues were being paid.

But any watering down of Sir David’s plan will provoke a fierce reaction from Mr Cable, who views pay transparency as vital in giving shareholders the tools they need to crack down on excessive bonuses.

Last November he attacked Sir David’s original plan for disclosure as “a mouse of a report”; any dilution of his proposals would cause acute embarrassment to the Lib Dems.

Mr Osborne’s team said he would put forward proposals on bank pay shortly, including measures to implement new EU standards, which require a larger share of bonuses to be deferred, linking them more closely to long-term performance.

But bankers believe the chancellor cannot abandon the promise of greater transparency in 2011 altogether, because of Mr Cable’s ferocious opposition.

One option mooted is to require banks to disclose all payments above £500,000 but scrapping any additional breakdown into pay bands, providing shareholders with a deluge of unspecific information.