EU hails ‘breakthrough’ deal to cap bankers’ bonuses

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Bankers in Europe face a cap on bonuses as early as next year, following agreement in Brussels early Thursday (28 February) to introduce what would be the world's strictest pay curbs, in a move politicians hope will address public anger at financial-sector greed.

The provisional agreement, announced by diplomats and officials after late-night talks between EU country representatives and the European Parliament, means bankers face an automatic cap on bonus payouts at the level of their salaries.

If a majority of a bank's shareholders vote in favour, that ceiling can be raised to two-times pay.

"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," said Austrian MEP Othmar Karas (European People's Party), who helped negotiate the deal.

Such limits to bankers' pay, which is set to enter EU law as part of a wider overhaul of capital rules to make banks safer, will be popular on a continent struggling to emerge from the ruins of a 2008 financial crisis.

But it represents a setback for the British government, which had long argued against such absolute limits. The City of London, the region's financial capital with 144,000 banking staff and many more in related jobs, will be hit hardest.

As it stands in draft legislation, the cap would also apply to bankers employed by an EU institution but based elsewhere globally, in a centre such as New York, according to one official.

There are also provisions for adjusting the value of long-term non-cash payments, so that more bonus can be paid in that way without breaking through the new ceiling.

Irish 'breakthrough'

Ireland, which holds the rotating EU presidency and negotiated what it called a "breakthrough," will now present the agreement to EU countries.

The backing of a majority of EU states is needed for the deal to be finalised. One member of the European parliament privately signalled that the deal could yet change, pointing to the "reservations" of some EU countries.

Irish Finance Minister Michael Noonan said he would ask his peers to back it at an EU ministers' meeting on 5 March in Brussels.

The change in the law is set to be introduced as part of a wider body of legislation demanding banks set aside roughly three times more capital and build up cash buffers to cover the risk of unpaid loans, for example.

Some experts have criticised the EU, however, for failing to keep to all of the so-called Basel III code of capital standards drawn up by international regulators to reform banking after the financial crash.

The agreement on Thursday will also require banks to outline profits and other details of operations on a country-by-country basis.

Bonus ceiling

A ceiling on bonuses, the only one of its kind globally, is perhaps the most radical aspect of the new rules.

Many in banking argue, however, that such reform will do little to lower pay in finance, where head-hunters say some annual packages in London approach 5 million pounds (€5.77 million).

"If the cap is implemented, it could result in significantly more complex pay structures within banks as they try to fall outside the restrictions to remain competitive globally," said Alex Beidas, a pay specialist with the law firm Linklaters.

An earlier attempt to limit bankers' pay with an EU law forcing financiers to defer bonus payments over up to five years merely prompted lenders to increase base salaries.

But it would be harder for banks to raise base pay this time around. The bonus rules will come as part of wider legislation setting higher capital standards for banks, increasing their costs and curbing freedom to hike salaries.

Sharon Bowles, a British liberal MEP who chairs the Parliament's Economic and Monetary Affairs committee and led the negotiations on behalf of Parliament, hailed the agreement as a victory for the ordinary citizen and taxpayer "who end up having to pick up the bill for irresponsible or risky operations by banks".

Bowles said she was "really pleased" about the cap on bankers' bonuses. But she added said that curbs on irresponsible behaviour go further than that. "The measure, to include long term instruments such as shares or bonds which can be written down in the event of bad practice or irresponsible behaviour, is important in providing the right kind of incentives for bank employees who should be compensated for good performance and the long term interests and health of the financial institution they work for."

Bowles was particularly happy at new transparency rules for bank reporting. "We successfully introduced stronger provisions on transparency requiring European banks to fully disclose from January 1st 2015, on a country-by-country basis, what their profit and turnover is as well as the number of employees and any receipt of public subsidies. The time is right for greater transparency in international banking. Banks are at the heart of the economy and those taxpayers which have put up so much by way of public subsidy also have a right to know what those banks give back to society."

Vicky Ford, a British Conservative MEP who is one of the European Parliament's chief negotiator on the Capital Requirements Directive, was in two minds over the agreement, saying it contained both positives and negatives. "Overall this agreement will be positive for the real economy. We have managed to include provisions that will help savers and pensions, building societies and manufacturing industry; and we have included measures that will free up financing for small businesses," Ford said.

She also expressed fear that the proposed cap on bankers' bonuses might have unintended consequences and encourage some to flee Europe and relocate elsewhere.

"I do fear that a cap on bankers bonuses is a blunt instrument but I was pleased to sharpen it by including elements that encourage bankers to take long-term decisions, otherwise they risk their bonuses being clawed back."

"We have tried to limit the unintended consequences of this legislation. We may not have got this 100 percent right but I hope it is a step in the right direction."

The Greens in the European Parliament welcomed the outcome, outlining three major concessions from EU member states in the negotiation - "A cap on bonuses, on transparency of banking activities and on capital surcharge for systemic banks".

Belgian MEP Philippe Lamberts, who was part of the Parliament negotiating team for the Green Party, said limits on bonuses would respond to public concern over "the sometimes obscene levels of bankers' remuneration."

Lamberts particularly welcomed the requirement for banks to disclose their "profits, taxes paid and subsidies received" saying this was "crucial" to tackle issues like tax avoidance. "While this should come into force in 2015, it could be delayed if the Commission deems that these requirements are detrimental to financial stability and investment inflows."

European Parliament President Martin Schulz said in a statement: "I welcome the agreement on new capital requirements for banks. I thank the rapporteurs Othmar Karas, Udo Bullman, Sharon Bowles and Philippe Lamberts and Vicky Ford for their hard work. Their skill and commitment allowed the European Parliament to significantly improve the planned legislation, notably by limiting bonuses for bankers."

Capping bankers' bonuses in the EU has been on the Commission's agenda since the onset of the financial crisis. 

Under a deal struck by MEPs and EU member states in 2010, bonuses could be capped at 30% of their bankers' salaries, rising to as much as 20% for higher salary bands.

EU rules on compensation are enshrined in proposed amendments to the existing Capital Requirements Directive.

  • 5 March: EU finance ministers to debate banker's bonuses as part of wider proposals to regulate bank capital (CRD IV)
  • 15-18 April: Final nod of approval expected in Parliament (plenary vote)
  • 2014: Bonus cap could enter into force

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