Future of Finance: Banker Bonus in London

There are authoritative voices that believe London regulators need to act quickly and open up pay in finance to conventional market forces. As bonus season descends in London, the annual ritual is for brokers, bankers and traders to prepare for (sometimes) life changing payouts. Unfortunately, as a result of the financial collapse, payouts have shrunk and the players are dodging politicians and regulators. This involves three distinct scenarios: (i) how EU bonus guidelines affect the city’s competitiveness; (ii) the Royal Bank of Scotland taking control during the crisis; and (iii) identifying and addressing all underlying causes of the bonus controversy.

The EU has implemented a law that maximizes banker bonuses to twice their salary. This new regulation is aimed at the investment banks where bonuses can be huge. New York markets have show no sign they’ll follow suit, preventing any type of pay arbitrage between the US and Europe. This could find talented European bankers looking for employment in New York. That could lead to US banks relocating significant elements of their banking operations from London to Wall Street, a development that could threaten the London’s boom and ripple throughout the country’s economy.

As a result of the law and being the only leading British financial institution controlled by the state, the Royal Bank of Scotland has found itself smack in front of the political headlights. Chancellor of Exchequer George Osborne is a principal shareholder, putting him in an awkward position. He will be involved in a decision as to whether the Bank will pay the doubled salary bonus. He needs to weigh public outrage about the huge payouts alongside his responsibility to maximize the taxpayer’s value. His only out is if the bank caps bonuses before the ceiling.

What is surprising is the resilience of the bankers’ global pay to normal market forces. If any other bailed out sector where in this position, customers and shareholders would demand employee compensation find levels comparable with other professions. Even though remuneration has dropped throughout the industry, shareholders still gripe that a pay premium has to remain in banking. The reasoning is the banking model is favorable thanks to its promising returns.

While increased capital ratios, partial bans on proprietary trading and restrictions on over the counter trading has had little effect on the banks’ edge, the integration of trading, sales and advisory services in single institutions provides banks with a tremendous informational advantage. It also hides the product lines’ true profitability. This means consumers will not know for what they are paying out with individual products and services. While there is the opportunity to exert pricing pressure on the trade they can see, it is a hidden turn that’s facilitated by the edge that integrated banks take advantage of. This is what creates the potential for all the super-returns and the super-compensation.

Regulators and governing bodies are believed to have done little to make the world financial institutions safer. It is clearly understood they need to initiate the separation of the advisory and trading businesses in order to restore and promote transparency in the industry. This will open up pay rates to the conventional market forces. Any less would only mean that public attention will continue focusing on banking bonuses, a symptom but not necessarily the primary cause of an industry that is inherently flawed.

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One response to “Future of Finance: Banker Bonus in London

  1. Pingback: “Half of fund companies will disappear by 2030…” | Alpha Banker·

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