Windfall tax on bankers' bonuses labelled a drop in the ocean – but a blow to the City

Published on Wednesday 9 December 2009 22:05

BANKERS and brokers yesterday attacked Alistair Darling's windfall tax proposal claiming that it would discourage foreign financial institutions from investing in Britain.

The Chancellor's one-off measure was dismissed as a "totally gratuitous" gesture by Mark Ostwald, a strategist with the London-based independent broker Monument Securities.

Critics of the policy said that the 550 million that it would raise would have little impact on the 178 billion UK government borrowing forecast for this year and could drive banks out of Britain.

The British Bankers' Association argued that foreign banks would be hardest hit, as UK banks had already agreed to defer bonuses or pay them in shares instead of cash.

Mr Darling's tax is aimed at all UK investment and retail banks, building societies and UK subsidiaries of overseas banks. It will target discretionary bonuses above 25,000 with a 50 per cent tax rate.

The tax will be imposed on the pool of bonuses paid by a bank, rather than individual payments and it will be paid by the bank – not the recipient of the bonus.

Angela Knight, the British Bankers' Association chief executive, said: "Those foreign banks which reward their UK staff with contractually-agreed bonuses are likely to be the hardest hit.

"London may well look to them now like a significantly less attractive place to build a business."

Richard Lambert, the director general of the CBI, agreed. "The threat of an exodus of talent is real," he 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."

Michael McKee a partner for law firm DLA Piper said:

"These moves will certainly make international banks re-think the merits of using London as a financial base."

Paul Brewer, a senior partner at PwC, argued that by making the tax a "one off", Mr Darling was aware of the dangers of a more permanent measure.

Mr Brewer said: "The Chancellor has been very careful to make it a one off. He is clearly aware of the risk of driving the UK's extremely strong banking capability out of the country.

"He has achieved his objective of being seen to do something, but he is obviously aware of the impact that a more permanent measure would have had. But the half billion tax take from this is just a drop in the ocean in terms of the UK government's overall borrowing."

The Chancellor introduced the tax following the public outcry over the behaviour of the directors of the bailed out Royal Bank of Scotland, who threatened to quit if they were not allowed to dish out huge bonuses to their staff. It also follows the revelation that taxpayers are propping up banks to the tune of 850bn.

Some financial experts acknowledged that Mr Darling could have imposed a more punitive tax regime on financial institutions. "It's obviously cosmetic, given the amount it raises, and the government is playing to public opinion," said Paul Mumford, senior fund manager at Cavendish Asset Management.

"If they had whacked a windfall tax on banks, that would have been horrible – because when a new tax is introduced, it tends to stay. The government is being fairer than it could have been."

Dave Prentis, general secretary of the union Unison, felt that not enough had been done to tackle the banks bonus culture when the treatment of the bankers was compared with public-sector workers who will have a 1 per cent two-year pay cap and pensions cap imposed on them. "It is just not on to make nurses, social workers, dinner ladies, cleaners and hospital porters pay the price for the folly of the bankers," Mr Prentis said.

"The people who earn most should pay the most. Instead we have the disgraceful spectacle of rich bankers threatening to leave the country if they don't get their massive bonuses."

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