Abolish the banker bonus cap
One of the most controversial announcements on Friday was the decision to scrap the EU bankers’ bonus cap, which has limited payouts to twice workers’ wages since 2014. The rules were intended to end a bonus culture that prioritized short-term profits over long-term stability in the face of the financial crisis. But Conservative politicians, including the then chancellor George Osborne, opposed the cap from the start, warning it would harm competitiveness and increase banks’ fixed costs. The new government is taking advantage of Brexit to scrap the cap, in a move likely to be welcomed by employers who use variable pay to cut costs in slower years. But headhunters warn that the effect will be marginal and unlikely to create more jobs or lure many high-paid bankers to the UK, given that European staff tend to enjoy the reliability of salary-focused income, while bankers of the US are unlikely to leave New York for the same pay in London. The decision to lift the cap confused some banking bosses who said they had not lobbied for the change, nor had they been consulted on the proposals. Meanwhile, high-paid City bankers will still have an income tax cut to look forward to.
Reduction of stamp duty to support the housing market
Lenders have been accused of being slow to pass on rate rises to savers while raising mortgage rates for borrowers. Photo: Clynt Garnham Business/Alamy The rise in interest rates will boost banks’ net interest margins – which are a key measure of profitability and calculate the difference between what is charged for loans and deposits for deposits. Lenders have been accused of being slow to pass on rate rises to savers while raising mortgage rates for borrowers. The decision by Liz Truss’ team to incentivize would-be home buyers by doubling the threshold at which they start paying stamp duty to £250,000 will also support the housing market, which has shown signs of slowing. They also increased this from £300,000 to £425,000 for first-time buyers. Lloyds Banking Group, which owns Halifax and is the UK’s biggest mortgage lender, said in July it expected its lending rate to rise by single digits over the next 12-18 months in light of forecasts of an increase of interest rates. However, a stamp duty cut is likely to push lenders’ forecasts higher when they report third-quarter results in October and raise earnings expectations.
Cutting red tape
The chancellor also previewed “an ambitious package of regulatory reforms” which he said would be unveiled this autumn. It is unclear whether this will be in addition to the Financial Services Bill, which will effectively scrap EU financial regulations. Some of the biggest changes already in place include forcing regulators to look at companies’ “competitiveness” when applying UK regulations, not just whether they treat consumers fairly or hold enough capital to prevent potential risks . This is despite economists warning that it is an inappropriate return to pre-crisis conditions. And despite Kwarteng stressing that he regards the Bank of England’s independence as “sacred”, the government still plans to give itself powers “to direct a regulator to make, amend or withdraw rules where there are matters of significant public interest”. – a move that could also benefit City firms pushing for changes to UK rules.
Cancellation of corporate tax increases
Kwarteng also confirmed that the government will keep corporate tax at 19%, rather than raising it to 25% as originally planned by former chancellor Rishi Sunak. That move alone is expected to save City firms a combined bill of £4.5bn between 2023 and 2025, according to analysis compiled by the House of Commons Library. However, Kwarteng is canceling a planned cut in the bank surcharge that was intended to offset the increase in corporation tax, meaning it will remain at 8%, rather than falling to 3% next year. Smaller lenders, including the Co-operative Bank, will still benefit from a higher cap, with the chancellor promising the top-up will only apply to lenders earning at least £100m, rather than £25m. The combined tax rate for most banks and building societies, however, will remain at 27%.
Accounts are frozen to keep companies afloat
Fears of widespread corporate defaults among business borrowers were growing, with companies more exposed to price fluctuations than households as they do not benefit from the UK’s energy cap.
But Truss’ decision to lower the unit price of energy for businesses for at least six months means banks will be less concerned about businesses going under, protecting them from a potential spike in defaults.
