Even I, as a pro-European, am against an EU cap on bankers’ bonuses

THE latest EU rules to cap bank bonuses have the potential to severely damage a strategic sector, and one that Britain leads in Europe. I say this both as a passionate European and believer in European reform. The problem lies in the way the proposals have been drawn up. As they stand, they will do more harm than good. Further, they are in danger of undermining the EU in the financial sector – an area in which it currently enjoys widespread support.

It is hard to overstate the competitive disadvantage our banks will feel, given that the rules will apply to European banks globally, yet their global competitors will face no such restrictions outside the EU.

For example, HSBC staff will be subject to the rules worldwide, whereas for Morgan Stanley, only those working in Europe will be affected. European banks’ recruitment officers now, tasked with attracting the best talent, will discover that their jobs just got a lot harder.

For all the talk of Europe’s competitiveness against emerging markets, it is hard to see what this does to boost EU plc. I put this disparity to EU Economic Affairs Commissioner Olli Rehn at an event in London this week. He said that this first step is bound to be followed by wider agreement at G8, then G20 level. This may be well-intentioned, but he will know better than most that consensus on such sensitive issues is usually a long time in the making, if it is ever reached. In the meantime, the impact on the UK’s financial services sector, provider of over ten per cent of Britain’s tax revenues in 2012, will be felt in several ways.

Banking is characterised by a highly fluid workforce. Forcing banks to increase basic salaries will make them less flexible. It will be more expensive to let traders go in downturns, and conversely tougher to hire on the upturn. We need only look to countries such as Spain to see how damaging labour market inflexibility can be.

The most likely result will be that banks move senior traders out of London. As the FSA is unlikely to tolerate businesses being run remotely, this may in turn lead to the complete relocation of the businesses they run outside of London.

The Commission and MEPs hope these measures will address public anger at financial sector excess, but perversely, they will likely result in very large increases in salary and equally large reductions in the bonuses that were hitherto conditional on good performance. The fact that the Commission wants to extend the coverage to hedge funds, which did not play a part in the financial crisis, suggests that the motivations are more about punishing an industry than ensuring its prudent regulation.

This local solution to a global problem will only harm Europe’s great financial centre, the City of London. The UK government should fight hard at the next Council meeting to weaken these ill thought through measures.

Roland Rudd is chairman of Business for New Europe and RLM Finsbury, which advises RBS among other banks.