Climbdown over bankers' bonuses

Plans to cap bankers' bonuses are reportedly close to being scrapped amid fears the reforms would only serve to drive up salaries.

Legislation to limit bonuses to 100% of salary was proposed earlier this year by members of the European Parliament in response to public outrage over pay following the financial crisis.

But the Sunday Times has learned that the proposals are now being opposed by bureaucrats in Brussels and Berlin after the banking sector argued that overseas rivals would poach the most talented dealers from Europe, while big American banks have said they would be forced to move jobs out of London.

Investors also opposed the move, arguing that restricting bonuses to a percentage of basic pay will allow bankers to demand higher salaries, which would push up costs and dent shareholder returns.

A climbdown would be a major victory for the City and remove one of the biggest threats to the bonus culture in banking.

Big bonuses have been blamed for contributing to the financial crisis by incentivising bankers to take risks.

They have sparked mounting anger in recent years after Royal Bank of Scotland and Lloyds Banking Group were bailed out by the taxpayer as the wider UK economy struggles to cope with austerity measures.

Royal Bank of Scotland chief executive Stephen Hester gave up his bonus for 2011 worth nearly £1 million in response to the public outcry.

The pay proposals were to be tacked onto a new piece of European legislation that contains stringent rules about how much capital banks must hold to help reduce the chances of future bailouts.

A number of European governments have raised concerns over the principle of allowing Brussels to interfere in private sector pay and German officials are worried that the plans could be deemed illegal by the constitutional court.