Mark Kleinman: Why the City’s bonus cap move may not deliver Brexit bonus
Mark Kleinman is Sky News’ City Editor and writes a weekly column for Morning Wire, this week on changes to banker pay, what next for Foxtons and job cuts at the City’s mid-cap brokers
Goldman move may not deliver post-Brexit bonus
You have to hand it to Goldman Sachs: it’s not afraid to make decisions which reinforce the ‘giant vampire squid’ trope which has dogged it for the last decade.
So often a front-runner on pay in a literal sense, the investment bank is also setting the pace from a policy-making perspective. As I revealed on Sky News last week, it has decided to lift the bonus cap which restricted bonuses for its material risk-takers in London to a multiple of twice their fixed pay.
The biggest surprise is that it’s taken so long. Kwasi Kwarteng, the briefest of chancellors, announced plans to scrap the cap in the autumn of 2022, arguing that it would boost the City’s post-Brexit competitiveness.
He was eviscerated by the mini-Budget market turmoil soon afterwards, but his ambition endured. Jeremy Hunt, his successor, endorsed the plan, and last October the Financial Conduct Authority and Prudential Regulation Authority confirmed its abolition.
Richard Gnodde, chief executive of Goldman Sachs International, said that removing the cap would give it greater flexibility to manage its fixed cost base. It would also, he said, mitigate the inflationary pressure on salaries not capable of being clawed back in the event of wrongdoing or calamitous risk management failings.
As tempting as it is to place Goldman in the vanguard of banking venality, its arguments make prudential sense.
The shift to a 25-to-one variable-to-fixed pay ratio, is, of course, also a tangible way of reincentivising its top London traders and deal makers: it means a senior employee earning £500,000 in fixed pay can now receive bonuses of £12.5m, rather than the £1m ceiling under the EU cap.
Whether that encourages more of Goldman’s staff to relocate to London is debateable, but it certainly removes one of the potential reasons for leaving the UK.
The rest of the industry will surely follow. Indeed, HSBC won shareholder approval last week to axe the cap with barely a murmur of protest, and banks across the continent – from Deutsche Bank in Germany to Santander in Spain – have lobbied vigorously for its abolition by the EU.
Introduced a decade ago, when the industry was in the thick of contending with the behavioural scandals which emerged after the financial crisis, the cap was a misguided way to rein it in. European lawmakers will almost certainly decide to scrap it altogether. That would make sense, but it would also nullify any competitive advantage that Britain hoped to gain from this post-Brexit arbitrage.
Estate agents rush signals move for Foxtons
Intriguing developments abound across the UK’s estate agency industry, where ‘for sale’ signs seem to be springing up faster than new homes being put on the market.
As I reported yesterday, BNP Paribas’s real estate arm is hunting a buyer for Strutt & Parker, while LDC, the private equity group owned by Lloyds Banking Group, has hired bankers to sell Lomond Group, created from the 2021 merger of Lomond Capital and Linley & Simpson.
Next in the queue? The smart money surely has to be on Foxtons, the London-listed and capital-focused estate agency chain.
For one thing, several investors in the business have been vocal about pushing the company to explore a sale. Led by Guy Gittins, chief executive, it was recently reported to have drafted in bankers from Rothschild to advise it.
Notably, Rothschild also advised on the sale of Leaders Romans Group to Platinum Equity, the buyout firm, last year.
I understand from well-placed sources that in the last three months or so, LRG made an informal approach to Foxtons. Opinions vary about the nature and intensity of the conversations that ensued, although people close to Foxtons insist that a merger was not discussed in detail.
Even if that’s true (and I have my doubts), expect them to be revived. The synergies arising from a tie-up would be considerable, and Foxtons is now in a stronger position to contemplate a deal.
True, rental growth in London has stalled, and with interest rates likely to remain higher for longer, the next 12 months are unlikely to spell a bonanza for the industry.
Like any homeowner marketing a high-quality asset, though, Foxtons looks well-placed to trade – and LRG is unlikely to tolerate being gazumped.
City brokers’ job cuts mean more mergers on the stocks
Peel Hunt, Liberum, Stifel: the numbers involved may be small, but ongoing job cuts at the City’s mid-market broking firms tells you all you need to know about the near-term outlook for capital markets activity.
It’s important to keep this bloodletting in context – in the case of Peel Hunt and Stifel, only around 25 jobs are being axed between them.
At Panmure Liberum, the latest incarnation of renowned City names, the reduction is greater, but that’s a consequence of the merger which has brought it into being.
I understand that a memo circulated internally at both firms last week announced the intention to commence a consultation process that will entail headcount reductions once the Financial Conduct Authority formally approves the merger of Panmure Gordon and Liberum.
A source close to the latter says that roughly 20 per cent of the two firms’ combined workforce may go, reflecting overlapping functions and other merger synergies.
This won’t be lost on the sector’s other mid-sized players, who risk being orphaned in a market where delistings and an ongoing flow of takeovers is shrinking the client pool for everyone.