Bonus cap could hit 2,700 UK firms

Tim Wallace
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THOUSANDS of City workers could be hit by the EU’s planned bonus cap with brokers, asset managers and corporate financiers all under the cosh, as well as the bankers that politicians originally set out to attack, City A.M. can reveal.

Sources at the Treasury and the City watchdog last night confirmed that the new rules are likely to apply to all 2,700 firms covered by the Financial Services Authority’s remuneration code, an enormous increase on the initial plans to target banks alone.

In a huge power grab, Brussels wants the pay controls to cover finance firms’ staff across the globe, not only those in the EU.

That means the attack will deal a devastating blow to City firms’ competitiveness, leaving them struggling to attract star performers when US and emerging market firms will be able to pay far more generous bonuses.

“The FSA’s remuneration rules cover ‘code staff’ across financial services, not just banks, and the bonus cap could end up being based on that,” said a regulatory source.

That was confirmed by a Treasury insider with knowledge of yesterday’s negotiations between EU finance ministers.

“This may end up being decided between individual firms and their national regulators. The phrase in use at the moment is ‘key risk takers and decision makers,’ which could extend beyond just banks,” the source told City A.M.

Senior staff at the firms affected are already subject to strict pay rules that make sure most of their bonus is paid in shares, most of it is deferred, and stops guarantees of future bonuses being given to make sure pay is based on performance.

The new plan will see bonuses capped at the level of salaries, unless a supermajority of shareholders votes to double that cap.

Bankers fear the cap will push up salaries as bonuses fall, reducing lenders’ flexibility and stability in any future downturn or crisis.

And other firms who may be affected worry that rules designed for bankers are in no way applicable to other firms like hedge funds.

“The wide group of firms caught have very different business models, risk profiles, growth and revenue numbers. However, it seems the cap is built specifically for banks and we are therefore worried about unintended consequences,” said a senior City figure. “We strongly suspect that the Europeans have not considered the impact of the cap on non-banks, let alone done a proper cost/benefit analysis. This will lead to dramatically higher base salaries, less flexibility and ultimately a divergence of the interests of employees and shareholders.”

Yesterday’s negotiations between EU finance ministers ended in failure for the UK. Chancellor George Osborne agrees with most of the new bank regulations, particularly those which push banks to hold more capital and great liquidity buffers.

But he failed to convince any of the other 26 states the cap is a bad idea.

The plan will see further negotiation before a vote by the EU countries towards the end of this month – but the UK has no veto and is unlikely to gain any ground on bonuses. Osborne fears the plan is being rushed through, and hopes they can be delayed. If they are not finalised by June, they will only come into force in 2015. And he worries the cap will be counterproductive, hitting financial stability.

“Our concern is that this may have a perverse effect, it may undermine responsibility in the banking system rather than promote it,” Osborne said. “It will push salaries up, it will make it more difficult to claw back bankers’ bonuses when things go wrong, it will make it more difficult to ensure the banks pay when there are mistakes, rather than the taxpayer.”

Meanwhile shadow chancellor Ed Balls accused Osborne of failing to rein in bad behaviour in finance.

“Despite record fines for everything from mis-selling to Libor fixing and even money laundering, it has been another season of bumper bonuses,” Balls said. “Yet our chancellor finds himself in Brussels arguing against a plan to rein in excessive bonuses.”