The European Parliament's new law capping bankers' bonuses has met with a resigned acceptance in the banking community. But most bankers privately agree that national efforts are adequate already and that the EU's interference will only sow confusion and could lead to an exodus of talent. Writer Charlie Corbett
What is it?
New European legislation that will cap bankers' bonuses. By the time this winter's bonus season comes around, national governments will have to have put in place rules that limit upfront cash bonuses to bankers, defer large bonuses and link long-term performance to pay-outs.
Who dreamed it up?
The European Parliament.
What are the main provisions?
- Between 40% and 60% of all bonuses to employees considered to have a material effect on a bank's risk profile will have to be deferred.
- Subsequently, if an employee's performance is deemed to have declined, deferred bonuses can be clawed back.
- At least half of the upfront payments must be in shares or other instruments linked to bank results.
- Only 20% to 30% of the bonus can be upfront cash.
- Bonuses must be proportional to salary.
- National regulators will have some discretion in applying the rules but the overall percentages are fixed.
- Regulators could impose financial or non-financial penalties on groups with risky remuneration policies.
What's in the small print?
Every EU country has its own bonus regulations, many of which have recently been toughened up. It will take months to establish the practical effects of the EU's tough new law. The UK is a case in point. "The UK already has a carefully crafted banking remuneration code," says Michael Wainwright, a partner at law firm Eversheds. "It gives each bank leeway to implement controls that suit the organisation and culture of the particular bank, while giving the Financial Services Authority the option to impose sanctions if it considers that the objectives of the code are not being achieved. By contrast, the rules adopted by the EU are a blunt instrument imposing requirements across the board that are both rigid and uncertain in their interpretation... there is a risk that UK banks will be subjected to a combination of the UK approach and the EU approach, which will be extremely difficult to manage in practice."
What does the industry say?
Bankers are understandably mute about the proposals at present. The financial crisis is still fresh in people's minds and it is too soon to make noises about bonuses without stirring up more public resentment. However, there is a general feeling that early compliance with the new rules will morph into resentment down the line. Banks fear they will lose star performers to markets that do not have the same bonus regime. There is also confusion over implementation. Angela Knight, head of the British Bankers' Association, recently said the legislation was not clear on which institutions and which people would be affected.
How much will it cost?
In theory, reducing upfront cash bonuses will cut costs for banks. However, the likely result is that base salaries will increase instead to retain and attract 'star bankers'. Others argue that, unless the law is applied across the globe in equal measure, talented bankers will simply leave Europe and head east to financial centres such as Singapore and Hong Kong, where no such rules apply.
What do the regulators say?
EU officials claim the new laws will reduce the 'bonus culture' in banking. Arlene McCarthy, the member of the European Parliament steering the legislation through, says it will end incentives for excessive risk-taking.
The law of unintended consequences
There is the risk of an exodus of talented financial professionals from Europe. The chief executive of Twenty Recruitment group, Paul Marsden, says the clampdown will have little impact on the investment banking hiring environment but could be disastrous for Europe's alternative investment market, which could easily relocate. Ms Knight says politicians should realise that most banks have already changed their pay practices and that "this is an international and mobile business".
Could we live without it?
Each EU member state has already passed legislation of its own concerning bankers' bonuses. This renders the European Parliament's interference unnecessary.
