Attacking a proposed one-time tax of 50% on bonuses as "an assault," London bankers warned of an exodus of talent and potential long-term harm to the City
The City reacted with dismay after Alistair Darling confirmed plans for a 50 per cent "supertax" on banks' bonus pools, with one financial analyst describing the measure as an "assault on the prudent and the profitable".
Bob Diamond, the president of Barclays (BCS), defended the banking industry, saying that criticisms of "casino capitalism" and lenders that were perceived as "too big to fail" were "factually untrue" and "missed the point".
Mr. Diamond reiterated his warnings that bankers and institutions were "mobile"—implying that they might desert London's financial centre—and said there was an urgent need for a "level playing field".
The one-off tax will be imposed on banks rather than individuals, and will also apply to building societies and possibly other City firms such as hedge funds. They will have to pay the Government 50p for every pound they pay in bonuses above £25,000. Accountants at PricewaterhouseCoopers said that, once other taxes were factored in, this meant that the Treasury would take 66.63p in every pound of a bonus above the £25,000 threshold.
Nick Anstee, the Lord Mayor of London, said the levy had alarmed workers in the Square Mile and at least two foreign banks had put London on their "political risk" registers.
"I have talked to two senior bankers about this and their reaction is one of dismay. What we are looking for is consistency in tax and regulation. We are not getting it," he said. "Last year, financial services contributed 12.1 per cent of the total tax take. The City has responded well to regulatory and political changes. People want to be here but this puts that at risk."
He said London's financial sector could lose billions of pounds in business and face a similar exodus to that which hit Wall Street in 2002 after the US government introduced the Sarbanes-Oxley Act, setting new or enhanced governance standards for all American public company boards, management and public accounting firms. Hundreds of firms relocated to London because the law was seen as bureaucratic and prejudiced against non-US companies.
Ian Gordon, an analyst at Exane BNP Paribas, said Mr. Darling's supertax would unfairly penalise healthy banks, hitting Barclays most heavily but also HSBC (HBC) and Standard Chartered (STAN:LN). He added: "It is somewhat ironic…that the Government, in adopting such measures, would be focusing its attack on banks which adopted more prudent and cautious lending policies in the retail and commercial property markets."
Royal Bank of Scotland, whose board reportedly threatened to resign over the threat to bonuses, refused to comment, as did Lloyds and HSBC.
John Varley, the chief executive of Barclays, said: "Barclays understands why the Government must, in the short term, address the public finance issues the economy faces, and the tax implications which flow from that.
"But maintaining a vibrant and successful financial services sector is the best way to enable banks to make a substantial contribution to the UK economy as lenders, employers, and payers of taxes and dividends." He joined Mr. Diamond in calling for a "level playing field" and said "getting the balance right" was vital to Britain's future as a financial centre.
Angela Knight, head of the British Bankers' Association, said: "Viewed from abroad, London may well look now like a significantly less attractive place to build a business. We must repeat that only concerted international agreements will succeed in reforming remuneration in the financial sector."
Her comments were echoed by the Confederation of British Industry, whose director general Richard Lambert said: "A headline-grabbing tax on bankers' bonuses may have populist appeal, but the Government needs to take care not to put the UK's financial services sector at a comparative disadvantage internationally. The threat of an exodus of talent is real."
The Conservatives said they would not oppose the bonus tax but the party's maverick Mayor of London Boris Johnson felt no such constraints. He said: "While I understand the motives behind proposals to curb [the banks'] unreasonable behaviour, I am opposed in principle to random, unilateral and ill-thought-out measures that could drive financial services overseas."
Bob Diamond: How the tax would hit him
Bob Diamond would have cost Barclays more than £10m in tax had the Government's bank supertax been in force two years ago.
Mr. Diamond, whose warnings about the tax were reported in yesterday's Independent, earned a "direct" pay package of £21.125m in 2007.
His £250,000 in salary would not be eligible for the supertax. But he received £6.5m as a cash bonus, a deferred share award worth £11.375m and a "long term incentive" award worth £3m. The first £25,000 of the bonus does not incur tax, which leaves £20.85m, on which Barclays would have paid tax of £10.425m. This year's package has not been set but in 2007 Barclays reported pre-tax profits of £7.1bn. This year Barclays has so far made £4.5bn.