EU bonus rules make London uncompetitive

Last Friday, the EU outlined its latest proposals governing the payment of bonuses that will eventually be enacted as law in each of the 27 Member States.

These laws will be amongst the most restrictive in the world – limiting cash bonuses, imposing a deferral period on the payment of bonuses and, most controversially, allowing money to be taken back retrospectively when decisions taken are judged to have caused losses.

The motives behind such measures appear laudable; as with regulation, the EU’s policy makers are trying to minimise excessive risk taking within the financial services industry.

Understandably, bonuses of the scale we are used to reading about in our newspapers are unpopular with the public – at home and overseas. Faced with anger amongst the electorate and sensationalist headlines in the press, politicians clearly feel they need to be seen to be taking action, and bonuses are an easy target.

But once again, political expediency is placing our future international competitiveness at risk. Other financial centres – particularly those in America and the Far East – have no intention of restricting the way in which their financial institutions can pay their staff.

Of course London will remain the financial capital of Europe but what good is that if we cannot compete in the global marketplace?

It is also worth remembering that the payment of bonuses – or indeed the way they were structured – did not cause the financial crisis.

By restricting remuneration practices, financial institutions in the EU are being placed in an invidious position. Most of these institutions want to be based here but, in order to do so, many are now considering increasing basic salaries in exchange for shrinking their bonus pools.

This is a course of action we should endeavour to avoid. Bonuses, when used properly, are a sensible form of remuneration whilst raising basic salaries forces financial institutions into increased spending commitments that must be honoured even when performance is poor.

The unintended – or I hope they are unintended – consequences are clear for all to see.

We are faced with a situation whereby a proposal designed to increase security within the financial marketplace could result in a huge loss of revenues for EU governments as financial institutions take their business elsewhere or it could result in financial institutions engaging in even riskier practices.

Stuart Fraser is the chairman of the policy and resources committee at the City of London Corporation