NIILO Jaaskinen, advocate general at the European Court of Justice (ECJ), recommended yesterday that the court should reject the UK’s challenge to the EU’s cap on bankers’ bonuses, which restricts bonuses to 100 per cent of a banker’s pay (or 200 per cent with shareholder approval).
This wasn’t a big surprise, and it won’t have caused too many shocked bankers to sob into their Thursday evening drinks. George Osborne withdrew his challenge to the legislation yesterday, but it was always highly unlikely that the ECJ would have overturned Jaaskinen’s opinion. The odds were stacked against the UK government, given that the Court supports 70 per cent of advocate generals’ opinions on average. For an industry that’s been subjected to so many new regulations in recent years, banks will simply have to continue planning on the basis that the cap will be in force next year.
While unsurprising, the ruling was certainly disappointing. Not only is the UK fast gaining a reputation for being ruled against by the ECJ on matters relating to financial services, but it appears the European Commission and the European Banking Authority have decided that this cap will definitely work, and should be introduced by national governments for expedient reasons rather than for anything else. This is worrying. The bonus cap is a flawed policy and has been, so far, easily undermined.
Indeed, all the cap has done is generate inadvertent consequences. Specifically, it has compelled banks to increase fixed salaries to avoid slashing overall pay. Perversely, however, this has reduced the amount of bonuses that can be clawed back in the event of any conduct or prudential issues that might emerge in the future. Further, the Treasury has warned that pushing up fixed salaries is likely to make banks more unstable, not less, given that they have less flexibility to cut overall remuneration in difficult times.
Yet Jaaskinen appears to have dismissed the idea that this is a bonus cap entirely – on the basis that basic salaries, against which bonuses are pegged, are not being limited. A cap on the ratio is still a bonus cap.
We acknowledge, of course, that public trust in banking remains low and the IoD accepts that regulators must look at the issue of excessive pay in financial services. That’s why we welcomed proposals by the Financial Conduct Authority and Prudential Regulation Authority in July to extend the period over which bonuses can be clawed back from senior managers to up to 10 years. If it can be proven that an executive’s behaviour failed to create value for shareholders, or damaged the bank’s reputation, it is absolutely right that they should be forced to pay something back. This approach is far more effective than a counter-productive bonus cap, which pushes up fixed pay that cannot be clawed back.
It’s unlikely that the bonus cap will compel bankers to take flight and leave the City. Once again, however, it demonstrates that the EU is too focused on crude pay mechanisms and not on rewarding performance (or conversely punishing misdemeanours). As Tom Gosling from PwC said, asking perhaps the most important question of all: what do bankers get paid for in the first place?