A Europe-wide crackdown on bank bonuses must be implemented with equal force in all major financial centres, British officials said today.
A deal reached at talks between MEPs, EU government ambassadors and the European Commission is due in force at the start of next year in a bid to change the bank “bonus culture” and curb risk-taking in the economy.
Under the accord, due for final approval in the European Parliament next week, banks would still be able to set bonus levels, but would be stopped from paying them out in full, in cash, on time.
Instead immediate cash payouts would be capped at 30% of the total bonus and to 20% for very large bonuses. And half of any up-front payout would be in the form of “contingent capital” – funds recoverable first if the bank runs into trouble.
Payment of the rest would be deferred for at least three years and also made conditional on long-term banking performance.
A bank bonus code is already in place in the UK, but the EU deal covers hedge funds, 80% of which are based in the City of London and which have not been targeted before.
That raised fears of a flight out of EU financial centres to avoid the new restrictions, and the UK Financial Services Authority is looking at the potential impact on the City.
The new deal also covers bank pensions explained a European Parliament statement:
“Bonus-like pensions will also be covered: exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the underlying strength of the bank.
"This will avoid situations, similar to those experienced recently, in which some bankers retired with substantial pensions unaffected by the crisis.”
The controversial deal, part of the EU’s “Capital Requirements Directive” revised in the wake of the economic crisis, is in line with last week’s G20 declaration, pointed out a British diplomat.
But he said it was vital that agreement is put in place “in a co-ordinated manner in all major financial centres”.
British Labour MEP and vice-chairman of the European Parliament’s Economic and Monetary Affairs Committee, Arlene McCarthy, commented: “Two years on from the global financial crisis, these tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk taking. A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price.
“The public want banks to prioritise stability and lending over their own pay and perks. In the last two years the banks have failed to reform, and we are now doing the job for them.”
She went on: “At a time when governments are inflicting spending cuts on the public, including pay cuts for public sector workers, it would be obscene to allow the discredited bank bonus culture to continue.
But UK Independence Party MEP Godfrey Bloom said the move was “senseless” and would drive banking business beyond the EU.
He said: “This spiteful little measure will only cause the flight of the best banking talent and capital to places outside the EU, such as like Switzerland where they have more freedom to act as they choose.
“If MEPs want to cap the wages and perks of people, they should act first against the fat well-paid officials of the EU Parliament, over a thousand of whom get paid more than the elected MEPs.”