Foreign Banks Warn Over Bonus Cap Exodus

By Mark Kleinman, City Editor

Some of the biggest foreign banks operating in the UK have warned London's main banking watchdog that a European cap on bonuses would lead to an overseas exodus of their senior managers.

Sky News understands that a number of US and other banks headquartered outside the European Union have warned the Prudential Regulation Authority (PRA) that the imposition of an enforced pay ratio has already prompted senior executives to demand a relocation away from London.

Officials say that the warnings have prompted serious alarm at the PRA, which is concerned that major banks could be denuded of much of the senior management expertise required to operate under the regulator's aegis.

News of the overseas banks' warnings comes just days after Sky News revealed that the Chancellor, George Osborne, was taking legal action at the European Court of Justice to try to overturn the bonus cap.

Despite the challenge, banks operating in London will be forced to adopt the new rules from next year pending its outcome.

The PRA has already made clear its opposition to moves to restrict bonuses to - at most - 200% of base salaries, arguing that it risks increasing instability in the banking system by driving up fixed costs.

British-based lenders have also criticised the cap, saying that they will have little choice but to inflate basic pay if they are to compete with rivals unaffected by the new restrictions.

George Osborne is taking legal action to try to overturn the bonus cap

Andrew Bailey, the PRA's chief executive, said earlier this year that the cap would "reduce the discipline in the system but it won't reduce overall remuneration" and warned that it "will institute an unhelpful culture of banks spending their time finding ways to get around the rules".

Without a successful legal challenge, UK regulators have little scope to overturn or ignore the cap despite the fact that regulators and many Westminster-based politicians agree that it will be potentially counter-productive.

A PRA consultation paper on the latest European Capital Requirements Directive will be published in the coming weeks.

Douglas Flint, the chairman of HSBC, has paved the way for Europe's biggest lender to increase salaries in time for the introduction of the new ceiling.

Last week, a Treasury spokesman said the new rules would "make banks themselves riskier rather than safer [and] may undermine responsibility in the banking system rather than promote it".

"Regulation of pay in this manner goes beyond what is permitted in the EU Treaty. That's why we are challenging these rules in the European Court, to ensure the legislation respects the EU Treaty and actually achieves what it's meant to: a more stable banking system that serves the economy, businesses and consumers."

The PRA declined to comment on its discussions with overseas banks on the issue.

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US Shutdown: Deadline Passes Without Approval

US Government Shutdown Q&A

Updated: 5:51am UK, Tuesday 01 October 2013

:: Why is this happening now?

Normally the US federal budget is decided in March. Although it is proposed by the executive, headed by the president, it has to be put into law by the legislative branches of government – the House of Representatives and the Senate.

One element of the 2013/14 budget has upset the Republican Party more than any other.

Obamacare, as it has been called, is a healthcare plan that aims to provide greater access to affordable health insurance for poorer sections of society.

Several Republicans oppose it as it increases state spending and, they feel, interferes in what should be private matters.

In March, because the Republican majority House of Representatives and Democrat dominated Senate could not agree on a 2013/14 budget bill, a compromise was reached that kept the federal budget funded for a further six months while negotiations continued.

That six months was up on Monday at midnight. With no compromise reached and no bill approved to fund state spending, no money will be available to pay for non-essential services.

:: Why should the Republican Party do this?

American politics has become more partisan in recent years than at any time in recent history.

The 'Tea Party', a particularly right-wing, libertarian element of the Republican Party, has been increasingly determined to impose itself on the operation of the state.

Among its key aims are the reduction of the impact that government has on the life of an individual, and the reduction of government spending.

As well as believing federal government spending should be slashed in general, they believe Obamacare is in opposition to everything they stand for.

As a result, many Republicans who are allied to the Tea Party are so determined to stop Obamacare, they are prepared to effectively hold a gun to the head of government by refusing to back a federal funding bill that funds Obama's health care plans.

They want it thrown out or heavily watered down and this is their way of fighting for what they want.

:: Could this happen in the UK?

It is one of the particular characteristics of the US federal government system that the executive (i.e. the president and his cabinet), can be made up of people of a different political hue to the main chamber – the House of Representatives.

In the UK, the head of Government (i.e. the Prime Minister), only normally comes from the largest party, or grouping, in the main chamber (i.e. the House of Commons).

As a result, it would be rare for a Prime Minister in Britain to be opposed by the main chamber.

In America, the system of checks and balances that was put in place following the American Revolution means that a US president does not need the support of Congress.

This stops the President becoming too powerful, but can also mean that the head of state finds it impossible to push through legislation, as is happening at present.

:: What will happen next?

After the failure to reach a compromise, more than 800,000 federal government employees will be told not to come to work until a deal has been done.

Certain 'essential' government services, such as national defence, will still be provided but many of those deemed unessential will not.

With no funding approved, the federal government is also not allowed to borrow extra money.

As a result, in about two weeks it will effectively reach its credit limit and will be unable to pay interest on the debts it owes.

Many economists believe this could be disastrous for the US as world markets will lose confidence in its ability to pay its bills, with many investors potentially pulling out.

The consequences of that are hard to gauge but some fear it could trigger another world downturn.

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Minimum Wage Rises As Rogue Firms Targeted

Employers who fail to pay the statutory minimum wage face being named and shamed from today as the latest increases come into effect.

The adult rate has risen by 12p an hour to £6.31 and by 5p to £5.03 an hour for 18 to 20-year-olds.

The minimum for 16 and 17-year-olds increased by 4p to £3.72 while the apprentice rate goes up by 3p to £2.68.

The Government estimates that 890,000 people will receive a pay rise because of the changes.

Business Secretary Vince Cable said the Low Pay Commission recommended a rate which supported low paid workers without damaging their chances of getting a job.

"As signs of an economic recovery start to emerge, we need to do more to make sure that the benefits of growth are shared fairly across the board.

"That is why in addition to their ongoing annual remit, I am asking them (the commission) to extend their expertise to help the Government and business understand how we can deal with the issue of low wages in the economy.

In particular I have asked them to look at what economic conditions would be needed to allow the national minimum wage to rise in the future by more than current conditions allow," he said.

Unions have demanded the proceeds of growth are shared with workers.

TUC general secretary Frances O'Grady said: "Years of below-inflation rises mean that the UK's lowest-paid workers are now facing an historic living standards crisis.

"As the recovery takes hold we will need to see far bigger increases to the minimum wage to ensure that ordinary people and not just the super rich benefit from economic growth.

"This will need more than any one-off pre-election boost - we will need sustained stronger rises if the real value of the minimum wage is to be restored."

The Resolution Foundation think-tank said the minimum wage will be falling in real terms for the fifth year in a row despite the increase, because it is not keeping pace with rising prices.

Campaigners called for more companies and organisations to pay a so-called living wage, currently set at £7.45 an hour for the UK and £8.55 for London.

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America 'On Precipice' Of Government Shutdown

The US government is almost guaranteed to shut down on Monday night after House Republicans voted in favour of a temporary spending bill that includes a one-year delay for Obamacare.

The Republican-led House of Representatives passed the proposal by 231 votes to 192 in one of two amendments attached to a Senate spending bill passed on Friday night.

"I don't think we're near the precipice of a shutdown," said House Minority Whip Steny Hoyer. "We are on the precipice."

The White House and the leader of the Democrat-controlled Senate said they would not accept the plan.

"To be absolutely clear, the Senate will reject both the one-year delay of the Affordable Care Act (Obamacare) and the repeal of the medical device tax," said Senate Majority Leader Harry Reid.

"After weeks of futile political games from Republicans, we are still at square one."

Some White House staff may be told to take leave without pay

President Barack Obama also said he would veto the plan, resulting in the federal government technically running out of money on Monday night and forcing the first partial government shutdown in almost 20 years.

Nearly a million government employees will be forced off work without pay, and museums and national parks will close.

The row between the Democrats and Republicans over government funding has been rumbling on since 2010.

Since then there have been negotiations between the parties that have led to short-term stop-gap funding bills rather than longer term budgets.

The last time the federal government shut down was under the Clinton administration in 1995, when services ground to a halt for 28 days. It nearly happened again in April 2011.

If the shutdown does go ahead then a third of the government's 2.1 million employees will be kept off work - possibly without back pay.

Obamacare has been a divisive measure among Americans

National parks and the capital's Smithsonian museums will be closed, pension and benefits cheques will be stopped and passport applications will not be processed.

While 1.4 million troops would stay at work, they would not get paid.

The Pentagon's top financial officer Robert Hale has said that high-priority missions such as Afghanistan would not be affected.

However, he said that roughly half the Defense Department's civilian work force would be place on unpaid leave.

Training and a range of maintenance work would be cancelled.

Obama has told Republicans not to 'burn the house down'

Government agencies have compiled a list of essential workers, and critical services such as air traffic control would continue.

The Affordable Healthcare Act was passed into law in 2010 and has since been upheld by the Supreme Court.

It is a measure that has caused particular ire among Republicans and they have continually attempted to reverse it.

Mr Obama said Republicans should not threaten to "burn the house down because you haven't gotten 100% of your way".

He said: "No one gets to hurt our economy ... just because there are a couple of laws [they] don't like."

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Auto-Enrolment 'Success' Amid Tough Economy

Fewer people than expected have opted out of the auto-enrolment pension scheme since it was launched almost a year ago, according to a report which has identified a new mood of financial stoicism among the public.

The study - by pension provider Nest and researchers the Futures Company - concluded that the tough economy had triggered a fundamental shift in the way consumers handle their finances.

It said that more than 1.6 million people had been placed in workplace pensions since the roll out of auto-enrolment started last October with larger firms.

Three-fifths (61%) of people surveyed for the report, who are yet to be placed in a workplace pension, plan to stay in it, showing a sharp increase from less than half (47%), when similar research was carried out in 2011.

Just under one fifth (18%) of consumers disagree with the idea of auto-enrolment, marking a downward shift from 27% in 2011.

Auto-enrolment began over fears too few were saving for a longer retirement

So far, the rate of people staying in schemes once they have been opted in has been higher than many pundits had expected, the study said, with around nine in 10 people who are being auto-enrolled remaining in their pensions.

In trying to explain what was described as the "surprisingly low" opt-out rates, the report pointed to "growing evidence that the recession has changed consumer attitudes towards money".

The survey found that more than half (57%) of people would never spend money as freely as they did before the financial crisis, marking an increase from 48% a year ago and 43% in 2010.

Despite some more optimistic news about the economy in recent months, the report found that people are still keeping a tight control on their purse strings as living costs remain high compared to wage growth, with just 29% saying they do not pay off their credit card balance each month, down from 52% in 2011.

Survey: Consumers have become more wary about spending large sums

Of the workers questioned who have now been placed in a workplace pension, around half (51%) of those who had remained in said they felt it was time to start saving for retirement while a similar proportion (48%) agreed it made financial sense because the employer also contributes.

However, around one in seven (13%) also said they had remained in their pension because they had been "too busy" to opt out.

The drive to get more people saving for their future aims to head off a looming retirement saving crisis, amid fears that people are living for longer but not putting enough aside for their later years.

Up to nine million workers are expecting to be newly saving into a pension or saving more as the reforms roll out.

Charles Counsell, executive director of automatic enrolment at the Pensions Regulator said auto-enrolment had got off to an "excellent start".

He said: "Automatic enrolment has been successfully rolled out to more than 2,000 of the UK's largest employers and well over 1.5 million people are now saving for their retirement as a direct result."

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Chancellor: 'Jobless Must Work For The Dole'

The long-term unemployed will have to earn their benefits by doing full-time unpaid community work from next year.

From April, people still without work after two years on the coalition's Work Programme will face three options if they want to remain on the dole.

They will have to do community work such as litter picking, visit a job centre daily or take part in compulsory training to tackle problems like illiteracy.

Those who break the rules of the new Help to Work scheme, for example by failing to turn up without a good reason, could lose their benefit for four weeks.

A second offence would see them lose it for three months.

The Chancellor wants the jobless to earn their benefits

Chancellor George Osborne will unveil the tough US-style initiative in his speech to the Tory conference later today, pledging to end the "something for nothing" culture.

Ahead of his address, he insisted on Sky News that the policy was not a return to the Conservative "nasty party" of old - describing the move as "compassionate".

"This is not about punishment, this is about help," he stressed, but also said: "What we are saying is there is no option of doing nothing any more.

"We are saying we are going to help you into work but we are going to ask for something in return. I think it is a very compassionate approach to people who previous governments just ignored."

Amid concern that job centres will be over-stretched, he added that they would have extra money to police the scheme.

Potentially, around 200,000 long-term Jobseeker's Allowance claimants could be eligible for the new initiative.

But ministers believe the numbers on it will be significantly lower, as many of those working covertly will decide it is no longer worth trying to claim benefits and drop out.

The scheme, devised by Work and Pensions Secretary Iain Duncan Smith, will cost around £300m - with the money likely to be found from departmental underspends.

Sky's chief political correspondent Jon Craig described the new conditions as "a tough crackdown".

Labour's shadow chief secretary to the Treasury, Rachel Reeves, said: "It's taken three wasted years of rising long-term unemployment and a failed Work Programme to come up with this new scheme.

"But this policy is not as ambitious as Labour's compulsory jobs guarantee, which would ensure there is a paid job for every young person out of work for over 12 months and every adult unemployed for more than two years."

During his speech later, Mr Osborne is not expected to unveil specific action on living standards, despite pressure to respond to Labour leader Ed Miliband's energy price freeze pledge last week.

Instead, the Chancellor will stress the need to stick with the coalition's economic plans, warning that the UK still has not fully recovered from the credit crunch.

He told Sky: "Our economic plan is helping Britain turn a corner. We have dealt with the problems we inherited, we have still got a long way to go ...

"By contrast the Labour party got us into this mess and all I hear from them is that they want more borrowing and more spending. A set of gimmicky announcements isn't going to cover up the fact that they don't have a credible economic policy."

:: The Chancellor's speech to the Conservative Party Conference in Manchester will be broadcast live from 11.30am on Sky News.

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Church Consortium Wins RBS Branch Sale Race

Royal Bank of Scotland is to sell 314 branches to a consortium backed by the Church of England in a deal forced on the bank because of its taxpayer bailout.

It will see Williams & Glyn's, a bank brand that has been dormant for nearly 30 years, soon return to the UK high street to become a new competitor in the market.

The consortium includes Corsair Capital, Centrebridge Partners and the Church Commissioners for England - the church's pension fund.

The deal will give the church a role in high street banking after the Archbishop of Canterbury Justin Welby slammed controversial payday lenders for their rates before learning that the church had actually invested in Wonga, the country's best-known payday firm.

The Archbishop of Canterbury wants banking to have a moral compass

The new player, whose executives include former trade minister Lord Davies, has pledged to put lending to small business at its heart, give more funds to the community and cap its bonuses at 100% of annual salary.

RBS confirmed the investors would pay £600m for part of the business with the remainder being raised in a stock market listing at a future date.

RBS chairman Sir Philip Hampton said: "We are delighted to be working in partnership with these investors to establish a new challenger bank for UK customers.

RBS chairman Sir Philip Hampton

"Williams & Glyn's will play an important role in the UK banking landscape and will be an excellent new addition to the market, with a particular strength in small business banking - a sector that is so crucial to the UK's economic recovery.

"Much has been done already in building the standalone business, and today's announcement provides more certainty for our customers and employees ahead of a flotation."

Sky News revealed in July that the Corsair bid was being backed by the Church Commissioners for England in an attempt to establish an ethical dimension in the group's vision for the small business-focused bank.

An earlier deal to sell the network, codenamed Project Rainbow, which comprises all RBS-branded branches in England and NatWest branches in Scotland, fell through last year when Santander UK pulled out citing concerns about IT systems.

Santander had initially agreed to pay £1.65bn for the branches, which include £19bn of assets.

Lord Davies, who is vice chairman of Corsair Capital, said today: "We are delighted to have been selected by RBS.

"The Consortium views this as an opportunity to create a genuine challenger bank, which will be a vibrant, healthy competitive force in UK banking and a new financial services provider to the UK public and small and medium sized businesses.

"There is a great history in the Williams & Glyn's brand and the business has an opportunity to be at the forefront of the UK banking industry whilst making an active contribution to the community from its strong regional network."

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Ex-Barclays Chief In Frame For Lloyds Role

By Mark Kleinman, City Editor

One of the architects of the legislation that will force Britain's banks to ring-fence their high street lending operations is being considered as a surprise candidate to chair Lloyds Banking Group.

Sky News can reveal that Martin Taylor, a member of the Independent Commission on Banking (ICB) in 2010-11, is on a list of names approached about taking over from Sir Win Bischoff next year.

Mr Taylor's presence on the shortlist to chair Lloyds has emerged less than a fortnight after George Osborne, the Chancellor, began reducing the taxpayer's stake in the bank, raising £3.2bn from the sale of a 6% stake.

His name is an unexpected one to feature in the reckoning to succeed Sir Win is a surprise given that his last term in a UK bank's boardroom ended in ignominy at Barclays in 1998.

Lloyds has been searching for a new chairman for just over four months but is in no hurry to identify a replacement for Sir Win, who will not step down until its annual meeting next year.

The task of finding a new figurehead for the bank's board is likely to have been made significantly easier by the fact that the Treasury has begun selling its shareholding. A surge in Lloyds' share price during the last year would, if maintained, pave the way for further disposals ahead of the next general election.

The chairmanship of Lloyds is one of the most high-profile in British boardrooms. Sir Win, a former boss of Citi, the Wall Street bank, was appointed four years ago to replace Sir Victor Blank, who was forced to step down in the wake of Lloyds TSB's rescue of HBOS.

That deal resulted in taxpayers pouring more than £20bn into Lloyds to save the combined group, leaving UK Financial Investments, which manages the Government's stake, to threaten to vote against Sir Victor at its annual meeting in 2009.

Mr Taylor was a trenchant critic of banks' behaviour during the year-long probe into the structure of the industry that was chaired by Sir John Vickers.

He argued forcefully for the system of ring-fencing that will be adopted before 2019 by the major lenders, although Lloyds will be relatively unaffected by the policy because of its limited investment banking operations.

Last year, Mr Taylor recounted how he had been "among the first to succumb to the myth of (former Barclays boss Bob) Diamond's indispensability" as he outlined the need for a cultural overhaul of British banking.

If Mr Taylor was chosen as Lloyds' next chairman, he would have to step down as an external member of the Bank of England's Financial Policy Committee (FPC), which he joined only a few months ago. One banker said this weekend there was unlikely to be any question over conflicts of interest with either the ICB or FPC if Mr Taylor did take the Lloyds role.

Since being forced out of Barclays in 1998, Mr Taylor has served as an adviser to the international arm of Goldman Sachs, chairman of WH Smith and then of Syngenta, a Swiss-based agricultural chemicals producer.

The search for Sir Win's successor is being led by Tony Watson, the former fund manager who is Lloyds' senior independent director.

David Roberts, the bank's deputy chairman and another former Barclays executive, is seen as a strong candidate to land the role although it is unclear whether he wants it.

Lord Davies, the former trade minister, has also been linked with it although he has made it clear he is not interested and was this week part of the consortium which agreed to buy a stake in 314 Royal Bank of Scotland branches.

Odgers Berndtson, the headhunting firm, is leading the search, while Lloyds is also about to announce the appointment of a chairman of TSB, the 631-branch network it is spinning off as an independent bank.

Lloyds declined to comment on Saturday.

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Cameron Launches State-Backed Mortgages Plan

David Cameron will announce that state-backed mortgages to help people on modest incomes get onto the property ladder will start within days - three months earlier than planned.

The mortgage guarantees will allow buyers to acquire a newly built home or an existing property worth up to £600,000 with a deposit of only 5%.

The second stage of the Help to Buy scheme aims to boost mortgage availability by reducing the risk for lenders because the Government takes on the risk of default when it guarantees a proportion of a loan.

Mr Cameron says the 'earlier the better' for the scheme's launch

Mr Cameron believes that will help solve the skewed market that means people on good wages struggle to buy even modest properties because they cannot scrape together the massive deposits needed or find a mortgage.

The scheme was due to start in January next year but the Prime Minister will say at the Conservative Party conference today that people will be able to start applying for the new mortgage guarantee from next week.

Mr Cameron said: "Young people who've got a decent job and have got decent earnings - they cannot buy a house or a flat, because they have to have a £30,000, £40,000 or £50,000 deposit.  Now, if you haven't got rich parents, you can't get that sort of money.

"So we're going to launch the Help To Buy Scheme - it's not coming in next year, it's coming in next week, because I'm passionate about helping people who want to own their own flat or home.

"You take a nurse married to a teacher. They're both earning £25,000 - that's pretty close to average full time earnings. If they want to buy a £200,000 house, they're going to have to find a £40,000 deposit.

"Now, they can't do that, unless they've got rich parents. That's not right. That's not an aspiration nation."

But the scheme has attracted widespread concern, with some claiming it may lead to more problems than it solves.

Liberal Democrat Business Secretary Vince Cable warned the scheme "could inflate the market" and said he feared there was a "danger of getting into another housing bubble".

Former Bank of England governor Lord King said the scheme is "too close for comfort" to a general scheme to guarantee mortgages.

Mr Balls says the Government focus should be on affordable homes

Labour's shadow chancellor Ed Balls said: "If David Cameron is serious about helping first-time buyers he should be bringing forward investment to build more affordable homes. Rising demand for housing must be matched with rising supply, but under this government housebuilding is at its lowest level since the 1920s.

"Unless David Cameron acts now to build more affordable homes, as Labour has urged, then soaring prices risk making it even harder for first time buyers to get on the housing ladder.

"You can't deal with the cost of living crisis without building more homes, so it's no wonder that for millions of families this is no recovery at all."

The first stage of Help To Buy was launched in April and offers loans to give people the chance to buy a new-build home with a deposit of just 5%. The scheme has been credited with spurring a surge in home sales and driving up prices.

:: Watch Conservative Party conference coverage on Sky News from 2pm

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House Prices: Bank Given New Help To Buy Role

By Ed Conway, Economics Editor

The Bank of England is to be given effective control over the loan-to-value ratios of mortgages eligible for the Government's new Help to Buy scheme, it has emerged.

As of next September, the Bank's Financial Policy Committee will be able to impose swingeing fees on high-debt loans in the Treasury's mortgage guarantee scheme, potentially ruling out 95% loan-to-value products.

The news came after the Chancellor announced that he will give the Bank the right to review the scheme on an annual basis, instead of only after three years, as had been originally intended.

Under the original conception of the scheme, in which the Treasury will part-finance deposits to help prospective homeowners onto the housing ladder, buyers would only have to provide a 5% deposit, with the Government helping provide a further chunk.

However, Sky News understands that in an annual review, starting next September, the Bank will also be able to call for a specific increase in the fees banks will have to pay if they want to lend out a 90-95% loan-to-value mortgage.

Although the Bank only has the power to recommend the fee changes, Treasury insiders say they would be highly likely to implement them.

The other lever the Bank can pull is to recommend lowering the price of properties eligible for the scheme from £600,000.

According to documentation sent out to mortgage lenders, banks will be charged three different fees depending on the scale of loans they plan to extend under the scheme: one for an 80-85% loan, one for a 85-90% loan and another for a 90-95% loan.

Should the Bank's FPC become concerned about households overextending themselves, they could recommend an inordinate increase in the fees for the highest debt mortgages, effectively ruling them out in the market.

The development underlines the scale of concern in the Treasury and Bank that the Help to Buy scheme could have the potential to overheat parts of the housing market which already look unaffordable.

Research by Sky News has found that the average property in Kensington & Chelsea is now worth almost 30 times the average salary of those living in the area; this compares to an average ratio of 6.1 times across England and Wales.

According to Nationwide house prices rose by 4.3% in Britain over the past year – though the increase in London was 10%.

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