SENIOR CITY figures yesterday slammed the EU’s plans to introduce a cap on bank bonuses, saying new rules will increase risk, drive up redundancies, encourage US and Asian firms to move their best staff out of London and could even lead some banks to move their headquarters out of the EU.
Under the plans, bonuses will not be allowed to exceed salaries unless shareholders agree to a larger payout – limited to 200 per cent of base pay.
Pressure is mounting ahead of an EU meeting in Brussels next week for the UK government to defend the City against the rules, which will apply to banks’ operations all over the globe and give US, Asian and Swiss institutions a major competitive advantage over their British rivals.
“The cap has the potential to do damage to London that could be irreparable,” said one major UK bank, which declined to be named yesterday.
Mayor of London Boris Johnson also waded into the row, calling EU plans “possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire.”
“People will wonder why we stay in the EU if it persists in such transparently self-defeating policies,” he added.
By imposing a ratio between salary and bonus, EU lawmakers may force banks to increase base salaries – decreasing flexibility in a downturn and upping the number of redundancies in the already beleagured sector.
“The outcome will be an inflexible cost base, contributing to greater risk in banks,” said Simon Lewis from the Association of Financial Markets in Europe. “This will seriously harm European competitiveness and have a negative impact on the real economy.”
Recruiters fear the move will hit senior compliance and risk staff who are reigning in dangerous behaviour, again countering the aim of the cap.
“Top risk managers have a lot more control over trading activities, and with that comes greater rewards – they could also be affected,” warned Hakan Enver from Morgan McKinley.
Headhunters Robert Half expect the cap will drive staff into sectors unaffected by the rule.
“The attractiveness of hedge funds and private equity is always there,” said the firm’s Neil Owen.
The Treasury hopes to tweak the plan in last-minute negotiations next week. But the pay controls are part of a much wider package of reforms to banks, meaning it now faces a dilemma on the vote. Sources close to the talks do not expect major changes.