Banks will be among the biggest beneficiaries of Kwasi Kwarteng’s mini-budget after he announced a series of policies aimed at cutting costs, boosting profits, attracting staff, fueling property prices and reduce red tape.
Abandonment of the banker bonus ceiling
One of Friday’s most controversial announcements was the decision to scrap the EU bankers’ bonus cap, which has capped payouts at twice workers’ wages since 2014.
The rules were intended to end a bonus culture that prioritized short-term profits over longer-term stability as the financial crisis approached. But Tory politicians, including Chancellor George Osborne, opposed the cap from the outset, warning it would hurt competitiveness and increase banks’ fixed costs.
The new government is using Brexit to scrap the cap, a move likely to be welcomed by employers who use variable pay to cut costs in slower years.
However, headhunters warn that the effect will be marginal and unlikely to create more jobs or attract many high-income bankers to the UK, given that European staff tend to enjoy the reliability of salary-driven income, while US bankers are unlikely to leave New York for the same salary in London.
The decision to lift the cap puzzled some bank bosses who said they had not pushed for change nor had they been consulted on the proposals.
In the meantime, high-income City bankers will always have an income tax cut to look forward to.
Cut stamp duties to support the housing market
Rising interest rates will increase banks’ net interest margins – which are a key measure of profitability and explain the difference between what is charged for loans and paid for deposits. Lenders have been accused of being slow to pass on rate hikes to savers while raising mortgage rates for borrowers.
The decision by Liz Truss’ team to incentivize potential buyers by doubling the threshold at which they start paying £250,000 stamp duty will also support the housing market, which has shown signs of slowing. They’ve also increased that figure by £300,000 to £425,000 for first-time buyers.
Lloyds Banking Group, which owns Halifax and is the UK’s largest mortgage lender, said in July it expected its lending rate to rise in the single digits over the next 12 to 18 months at the light of expectations of a spike in interest rates.
However, a reduction in stamp duty is likely to push lenders’ forecasts higher when they release third-quarter results in October and raise earnings expectations.
Reduction of bureaucracy
The Chancellor also dragged out “an ambitious package of regulatory reforms” which he said would be revealed this autumn. It is unclear whether this will be added to the Financial Services Bill, which will essentially repeal EU financial regulations.
Some of the biggest changes already underway involve forcing regulators to consider the “competitiveness” of businesses when applying UK regulations, rather than just treating consumers fairly or holding sufficient capital to protect against potential risks. And this despite economists warning that this is an inappropriate return to pre-crisis conditions.
And although Kwarteng stresses that he regards the independence of the Bank of England as “sacrosanct”, the government is still considering giving itself the power “to direct a regulator to establish, modify or revoke rules when there are matters of substantial public interest”. – a move that could also benefit businesses in the city who are pushing to change UK rules.
Cancellation of corporate tax increases
Kwarteng also confirmed that the government would keep corporation tax at 19%, rather than raising it to 25% as originally planned by former Chancellor Rishi Sunak.
The move alone is expected to save businesses in the city a combined £4.5billion bill between 2023 and 2025, according to analysis compiled by the House of Commons Library.
However, Kwarteng is reversing a planned reduction in the additional bank surcharge that was meant to offset the corporate tax hike, 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 threshold, with the Chancellor promising the surcharge will only apply to lenders earning at least £100m, up from £25m pound sterling.
The combined tax rate for most banks and building societies, however, will remain at 27%.
Invoices are frozen to keep businesses afloat
Fears of widespread bankruptcies among corporate borrowers have grown, with businesses more exposed to price swings than households as they do not benefit from the UK’s energy cap.
But Truss’ decision to cut the unit price of energy for businesses for at least six months means banks will be less worried about businesses going bankrupt, shielding them from a potential surge in defaults.