THE EU’s determination to press ahead with a cap on bankers bonuses, despite the chancellor’s opposition, marks an unprecedented development in the UK’s relationship with the EU over financial services.
Finance is an important EU industry, but the UK is by far the dominant player. We account for 61 per cent of the EU’s net exports in financial services and 36 per cent of the financial wholesale market. To be outvoted on such a fundamental issue should set alarm bells ringing. More worrying is that waiting in the wings are 40 other directives and measures aimed at restricting financial services activity.
There is rightly public anger over behaviour within banks that led to the crisis. And bonuses should be reformed – they must reward success and punish failure. Bankers should be paid according to success over the short, medium and longer term, with clawbacks for failure. Where criminality is proven, bankers shouldn’t just be sacked, they should go to prison
The problem is that the EU’s proposals won’t do what’s needed. In fact, they risk serious unintended consequences, and banks might even change business plans to side-step them. The last thing anyone wants is compensation structures that focus on getting around the system, rather than ensuring accountability. We need to get the balance right.
And the issue is critical to the UK. Finance accounts for 11 per cent of the UK’s annual tax take. One in ten doctors, nurses, teachers, policemen and other key public servants are paid for by financial services activity. So we must defend the industry against intervention from Brussels when it is damaging to our national interest.
The time has therefore come to draw a line in the sand. The Luxembourg Compromise, which unofficially protects EU member states from having their interests in key industries overridden, is obviously meaningless where UK interests are concerned. So ministers must seek an “emergency brake” over EU legislation affecting financial services to protect this critical but globally-mobile industry.
Where proposals are judged to have a disproportionate impact, be discriminatory, or to undermine the Single Market, a country should be able to refer them to the European Council, where unanimity would be required. A certain number of member states could then proceed with a proposal among themselves under “enhanced cooperation”, as is happening with the financial transaction tax. The UK should also seek to extend the “double majority voting” mechanism, established to prevent the Eurozone caucusing in the European Banking Authority, into other areas of the EU.
These mechanisms would require changes to the EU treaties, so my hope is that deeper fiscal and economic integration in the Eurozone offers the opportunity for the UK to negotiate. The Prime Minister set out his approach in the Bloomberg speech earlier this year, and left nobody in any doubt about his position when he exercised the British veto in December 2011. I commend the government for showing the same determination now, and I urge it to follow through in negotiations to achieve the safeguards that this critical sector needs to thrive.
Andrea Leadsom is Conservative MP for South Northamptonshire.