E.U. Caps Bankers' Bonuses



The Council of the European Union has voted to cap bankers' bonuses, with only the U.K. voting against the proposal. The directive will limit bonuses to no more than twice bankers' salaries and go into effect in 2015. The measure comes in response to public anger over continuing financial crises and a desire on the part of E.U. officials to reduce risk in the financial sector.

Business leaders and commentators have criticized the cap and believe the result will be to drive up base pay and reduce flexibility over remuneration in times of crisis.

Christopher Mordue, partner at law firm Pinsent Masons, says: 

This European Union Council vote in favour of the bonus cap is no surprise and at least the banks have a clear timetable for reforming their bonus structures. The problem is that there are still some significant uncertainties about how the cap will work and who will be caught by it. Firms now face the difficult task of overhauling their remuneration practices in a short timescale without a clear picture of the final shape of the new rules.This is likely to result in broad brush compliance approaches, including increasing salary to mitigate the impact of the cap.

The removal of the ability of firms to reward their most successful workers will place E.U. financial centers at a competitive disadvantage when compared New York or Hong Kong. 

For some members of the European Parliament, the possibility of financiers relocating to these friendlier market centers is not a problem but a potential benefit.

From Bloomberg:

"If bankers and traders want to leave and go to other jurisdictions, it just shows that they do not have confidence in their own performance." Sharon Bowles, chairwoman of the [Economic and Monetary Affairs] committee, said in an e-mailed statement today."To those that would leave I say good riddance."

Because of the importance of financial services to the U.K. economy, British politicians have been the most vocal in their criticism of the move. London Mayor Boris Johnson has described the directive as "possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire."