The handouts will keep falling until 2015, the Centre for Economics and Business Research CEBR.L said on Monday, reflecting the impact of tougher financial market conditions and public disquiet over the size of banker payouts.

Yet the impact of the squeeze on the sector goes further than bonus payments and the researchers also said employment in London's banks, brokerages and other financial sector firms - collectively known as the City - will keep shrinking.

They said this would allow rival centre Hong Kong to overtake London by size in the next three years.

Banking job cuts have hit London hard in the past three years as euro zone woes and regulation eat into firms' income, and a further slowdown in stock trading and mergers and acquisitions is expected to affect pay levels for 2012.

Payouts have also fallen after a public backlash over big bonuses, blamed for helping create the climate which led to the financial crisis which started in 2008. Shareholders upset about poor returns are becoming more demanding too.

Shareholder activist group Hermes Equity Ownership Services EOS.L on Monday called on the industry to base bonus payouts on a performance period of three to five years, rather than annual performance, echoing earlier proposals on how payouts should be calculated.

Hermes EOS, which is owned by the BT Pension Scheme, Britain's biggest private sector pension fund, also recommended banks pay only up to a quarter of their revenue to staff, rather than the current 40 to 50 percent.

Earlier this year several banks including Barclays (BARC.L) were hit by a bigger than usual backlash from shareholders over pay when they sought approval for payout plans.

"The money that governments intend the banks to use to rebuild their balance sheets has been in large part siphoned off into individuals' pockets," Hermes EOS said in a report.

Hermes EOS, which has over $120 billion of assets under advice, said pay changes were one of the overhauls needed to make banks investible again.

THE TAXMAN LOSES

London financial sector bonuses for 2012 - likely to be paid in January or February next year - will be more than 86 percent down on the 11.5 billion pounds worth of payouts in 2 0 07-2008, when dealmaking was booming just before the financial crisis, the CEBR data showed.

Base salaries have risen since then, partly in response to controversy over incentive-related bonuses, meaning overall levels of pay have not dropped by quite so much.

The CEBR, which had originally forecast bonuses of 2.3 billion pounds for 2012, predicted they would hit a low of 1.2 billion in 2015 before gently creeping upwards again.

Last year's bonuses totalled 4.4 billion pounds, it said.

"The biggest loser from this is the taxman, who typically earns more from City bonuses than the employees," CEBR Chief Executive Douglas McWilliams said in a statement.

McWilliams said government revenue from the City - including from corporation tax and other levies - would likely be around 40 billion pounds for 2012, down almost by half from the 70 billion banked in 2007/08.

In a separate study, the CEBR also forecast that Hong Kong would overtake London as the world's biggest international financial centre in 2015, as Asian markets grow.

Hong Kong employed less than half as many people in financial services than London in 2005, but job numbers in the Asian hub will have grown by almost 100,000 in the next three years.

Meanwhile the City will continue to shed jobs, with another 13,000 set to go next year.

Technically, London is already behind New York by finance employment levels, but the CEBR said many of the New York jobs were focused on servicing the domestic U.S. economy, meaning that for now London retains its crown as the top international centre.

Hong Kong has gained ground primarily because of more dynamic growth in Asian economies, the CEBR said, while the growing use of China's renminbi as a currency worldwide will also boost it as a centre. (Editing by Richard Chang and David Holmes)

• A Permanent Economic Emergency