U.K. banks should cut back on lavish pay for top executives, the Association of British Insurers urged Tuesday.
The association, whose 300 members include major shareholders in banks, called for a fundamental review of pay and bonuses at the end of a difficult year in which banks' stock prices have fallen and several face huge payouts to compensate buyers of payment protection insurance.
There is concern as well that banks should be hoarding cash to protect against the possibility that a European nation defaults on its debts or the 17-nation euro currency collapses.
"It is our members' view that it can no longer be business as usual for this remuneration round," the association's director general, Otto Thoresen, said in a letter to all U.K.-listed banks. "They expect to see significantly lower bonus pools and individual awards, given the current market circumstances."
The Center for Economics and Business Research has estimated that bonus payments by financial institutions in London will be down by 38 percent this year to 4.2 billion pounds ($6.6 billion), the lowest since 2003. The Financial Times, however, reported that the proportion of revenue spent on pay and bonuses has risen since last year.
The seven- and eight-figure bonuses pocketed by some bankers are a sensitive political issue, especially since taxpayers rescued Royal Bank of Scotland and Lloyds Banking Group during the credit crisis and continue to hold significant stakes in both banks.
Following a report that RBS was setting aside more than half a billion pounds ($785 million) for bonuses, Prime Minister David Cameron said that amount was unacceptable.
"The British government are a seriously large shareholder in RBS, and we will be making our views known," Cameron said.
The Bank of England warned last week that "the outlook for financial stability has deteriorated materially since June," and the bank's governor, Mervyn King, urged banks to hold down bonuses and dividends to beef up their balance sheets to protect from any shocks.
Thoresen said banks should reduce the amount paid to individuals instead of cutting the total payout by laying off employees. He dismissed the banks' argument that lavish pay is needed to retain key staff.
"Very few banks are recruiting and most are reducing employee numbers. Given this lack of competition for staff, our members believe that the retention risk is now reduced," he said.