As top bankers around the City of London prepare to receive their bonuses, some might be feeling they could have done better elsewhere.
New rules on pay, coupled with warnings from the UK government that banks must show restraint on bonuses, mean awards to British bank staff – while still generous – could fall below those in other countries.
The banks appear to have largely escaped efforts by politicians to force dramatic cuts in bonus pools and reveal the salaries of the highest paid staff – but the pressure for restraint on pay is adding to a sense that being based in the UK is losing its allure.
When the government talks tough, however, it comes up against none too subtle threats from the big banks that while they would prefer to be based in the UK, if pushed, they would consider moving elsewhere.
The question is, would any of the big banks really go?
“There has been a lot of sabre rattling from the banks,” says Nick Woolf at Sainty Hird, the executive search firm. “But so far there hasn’t been a huge demand from people saying ‘get me out of the UK’.”
One big threat hanging over the industry is from the government-
appointed Commission on Banking, which is examining the merits of separating institutions’ retail and investment banking divisions.
While the commission is steering away from a full-scale break-up of the big banks, any move to draw firmer lines between their operations would be extremely costly, disruptive and detrimental to the likes of Barclays, HSBC and Royal Bank of Scotland.
Also, from this year, banks operating in the UK are having to contribute to a new industry levy that will eventually raise about £2.5bn a year for the public purse. On top of that, senior staff at UK banks are having to take a higher proportion of their bonuses in shares rather than cash and defer it over a number of years.
But while the lure of lower taxes and lighter regulation in markets such as Asia can be a powerful one, the trouble for banks as big as HSBC or Barclays is that moving overseas would be hugely complex. Consultants point to the cost and uncertainty for shareholders and customers, and the myriad practical considerations for companies looking to relocate.
For example, PwC highlights issues around infrastructure. Would institutions have access to adequate legal or accountancy services, or sufficiently sophisticated IT trading platforms? Are there restrictions on cross-border trading in the new jurisdiction or regulations that would need to be met?
Institutions would also have to consider the quality of life for staff and their families – schools and healthcare, for example, difficulties over visas and any language barriers. Even more mundane considerations such as transport to and from the new office and the price and availability of accommodation need to be examined.
“It is a massive step change to relocate a head office,” says Andrew Hanson, director of financial services recruitment at Robert Walters, the search agency.
However, while the City of London is yet to lose one of its leading banks, a number of smaller, more nimble institutions, such as hedge funds, have left and could be paving the way for some larger institutions: the idea seems to be gaining momentum.
“There are some areas where there is a real concern,” says Angela Knight, chief executive of the British Bankers’ Association. “The item is on the agenda now, which is serious in itself. It is something that is being considered on a regular basis.”
HSBC and Standard Chartered, which both generate the majority of their revenue in Asia, and Barclays, which has a large investment bank in New York, have all made clear they may not be firmly wedded to the UK – although none has gone as far as to say where they might go.
Also, even if banks do not go as far as moving their headquarters, Ms Knight points out that one effect of the tougher UK environment is that they are not hiring as many British-based staff.
“The question is where they put the next investment, where they recruit the next 100 people,” she says. “While they may not be pulling their investment out, they may increase it elsewhere.”
One of the first moves by Stuart Gulliver, the new chief executive of HSBC, for example was to bolster its senior management team in Asia, the bank’s heartland for a long time.
Meanwhile Standard Chartered, which is particularly frustrated with the UK climate, given that it generates almost all of its revenue elsewhere, recently raised £3bn of fresh capital which will be used to drive its growth overseas. The bank has been on a hiring spree, adding about 7,000 people during 2010 across Asia and other emerging markets, including Africa and Latin America.
Consultants say banks could also single out departments or individuals to move overseas.
Clearly, banks would want to retain a UK branch network and would need client-focused staff – such as mergers and acquisition advisers – to remain close to the local market in which deals are being done.
But there are a number of more mobile operations, notably trading desks, where most of the banks’ highest paid – and highly taxed – individuals tend to work. Given the sophistication of modern technology, traders are no longer fixed to a desk in a particular market as they can access data instantly from almost anywhere.
Well-paid traders have an incentive to move, given lower tax rates elsewhere, notably in Asia, and PwC also points out that these roles tend to be held by younger individuals with looser family ties and less dependence on professional services in their home market.
But while movement so far is at a trickle, there are fears that serious action to curb the sector – such as the separation of retail and investment banks – could test banks’ patience.
“The outcome of the banking commission will be hugely important to what banks decide to do,” says Chris Harvey, global head of financial services at Deloitte. “Many senior executives have already publicly questioned what value they get out of the banking levy and attempts to break up the banks would give them another reason to reconsider their location.”
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