THIS should be a time for muted celebrations in the City: the FTSE is at a five-year high; the Dow has just smashed all previous records; and it looks as if the UK economy might have eked out a tiny bit of growth in the first quarter.
Yet the mood is understandably glum this morning. George Osborne has been left utterly defeated in Brussels, with a humiliated British government conceding that there will now be a bonus cap, in the greatest interference in the right of employees and employers to voluntarily negotiate pay since the disastrous price and wage controls of the 1970s. I’m not and have never been a banker, can only dream of a bonus worth 200 per cent of my base pay (the new maximum, from next year) and believe that the City still requires further, constructive reforms – but this cap is ridiculous, counter-productive and wrong in principle.
The new rules will lead to an increase in base pay – they won’t reduce overall compensation. This will dilute the link between pay and performance, make pay shorter-term (as bonuses are inevitably deferred, and base pay is immediate cash), make the banking system riskier by increasing its fixed costs (base pay) and reducing its variable costs (bonuses), lead to much larger sackings in downturns and increase the threat of institutions going bust, make it much harder for UK and European banks to recruit staff in New York, Singapore or Dubai, where they will be competing against players that are not bound by these rules, incentivise Asian and US firms to base more key staff outside London, make it harder to operate global teams, and encourage London based firms with extensive international operations to relocate abroad to mitigate the cap’s impact.
As we explain on page 1, it is looking increasingly likely that the measures, as they are currently being framed, won’t just apply to “banks” but in fact includes all 2,700 firms with so-called “code” staff, such as fund managers (including most hedge fund managers and all UCITS investment firms), some firms which engage in corporate finance, venture capital, the provision of financial advice, brokers, several multilateral trading facilities and many others. As ever with these ridiculous rules, the devil will be in the implementation by the UK authorities – but I’m not optimistic. These sorts of pay rules will be the thin end of the wedge; they will eventually be applied to other industries and markets as the EU seizes ever more powers in the name of “financial stability.”
Most of Europe has it in for the City, London’s most important asset. It is a tragedy that the British government has been too cowardly to do anything about it. If Britain had really wanted to block this, it could have threatened to disrupt all EU business until it got its way. And no, saying yes to everything else, including the EU budget, or being more “constructive” or more “engaged” would not have worked.
France would never have allowed a measure deliberately designed to cripple the wine industry, and Germany would not have tolerated a policy deliberately designed to push car manufacturing offshore. The uselessness of the British government during these negotiations was matched only by that of the industry itself. Banks have refused to speak publically, preferring to seek deals behind the scenes. Their silence was as shocking as the failure of their strategy was monumental. City workers have most of all been let down by supporters of the increasingly destructive European Union, including many of the firms now being hammered by its maliciousness and stupidity. At least the weather is finally improving.
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