Bonus of contention

The confusion surrounding the banker super-tax and to whom it will actually apply still rolls on nearly a week after the Chancellor's pre-Budget report announcement of a 50% levy on all banker bonuses of more than £25,000, up until 5 April 2010.

Although at first it looked like fund managers, brokers and advisory boutiques had had a lucky escape, this now looks far from certain. Amid growing confusion over who exactly will and will not be affected (and a bit of controversy over the exclusion of N M Rothschild) the government is now expected to extend the scope to ensure that Rothschild (and others) do not slip through the net by way of their non-standard year-ends and other quirks.

Despite a lack of clarity, City heavyweights have wasted no time in launching a riposte - eight of Britain's top stockbroking firms have joined forces to fight the government and its tax. London-based interdealer broker Tullett Prebon yesterday went one step further when it offered staff the chance to move to one of its overseas offices in regions with 'more certain tax regimes.'

Although judged by some industry observers to have been a hasty move by Tullett, one can hardly blame them and others when the picture remains so unclear. Claims of a mass exodus to Switzerland are thought by many to be exaggerated, particularly with signals from our European neighbours that they will be potentially following suit. However this, combined with the 50p tax rate, does little to reassure overseas banks that the UK is a place to stay and do business.

However what is most likely to happen, and will be ugly, is a surge in guaranteed bonuses. Exempt from tax, higher base pay is likely to be taken up even more widely (adding to the already growing trend.)

In reality, it is this type of City remuneration, not bonuses, which is the most undesirable – not only because of the proven encouragement of highly risky and reckless behaviour but the hefty bonus contracts into which banks are then locked and may later on be able to ill afford . If profits start to fall, banks will have little flexibility to cut remuneration and it could well be in the end that it is the shareholders that lose out as institutions slash dividends in order to dish out the guaranteed bonuses to retain top staff.

SS