EU deal on capping bonuses will change the financial sector

Labour may have temporarily lost legislative power in Westminster, but Labour MEPs still have that power and used it to great effect last week, securing strict limits on upfront cash bonuses to ensure that bonuses are linked to long-term success rather than mere risk-taking.

Labour may have temporarily lost legislative power in Westminster, but Labour MEPs still have that power and used it to great effect last week. In the final hours of the Spanish presidency, Labour’s Arlene McCarthy secured Council and Commission backing for the Capital Requirements Directive (CRD 3), which will place strict limits on bonuses – particularly bailed-out banks.

The main achievements of Ms McCarthy and the Socialist group are strict limits on upfront cash bonuses to ensure that bonuses are linked to long-term success rather than mere risk-taking. The maximum amount of upfront cash is 30 per cent of a bonus, and 20 per cent for large bonuses of £1m or more.

The rest must be in either contingent capital or shares, must be deferred, and can be clawed back if investments do not perform. For bailed-out banks, the rules are, rightly, much stricter. Nationalised banks will be required to prioritise repaying taxpayers and strengthening capital bases over paying bonuses.

The notorious saga over Fred ‘the shred’ Goodwin’s pension shouldn’t be repeated as the value of large pension payments must also be linked to the strength of the bank. Had this directive already existed, Goodwin’s ill-deserved millions would have been decimated. This directive won’t stop successful financiers from being extremely well paid, but it will change the mentality of investment firms and banks – with long-term success rewarded rather than reckless short-term risks.

Indeed, an astonishing fact is that banks have actually increased bonus payments since the crisis by £10bn, according to the Bank of England’s financial stability report published last week. That £10 billion could have been used as capital to support small businesses and prevent families from losing their homes.

This directive also marks out political dividing lines between Labour and the Coalition on changing the culture of the City. Osborne’s ’emergency budget’ may have proposed a bank levy raising £1.2 billion, but considering the £850 billion of taxpayers’ money used to prop up the banks, this is a tiny drop in the ocean – it is half the amount raised by Alistair Darling’s levy on bonuses last year. Now it is Labour MEPs who are leading pan-European reform of the financial sector.

The new directive will become EU law imminently, but member states will decide how quickly and strictly they implement the law at national level. It will hurt the Government to have to implement legislation that will hit their City chums in the pocket. Labour MPs should start campaigning for rigorous enforcement of this law, which will save the taxpayer a large amount of money, increase the capital base of banks, and leave them with no excuse for not lending.

It is a much needed good news story for Labour supporters and all those who consider themselves progressives; it’s also a reminder to Westminster – don’t forget Brussels.

4 Responses to “EU deal on capping bonuses will change the financial sector”

  1. Trakgalvis

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  2. Jenny Bunker

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  4. Politics Summary: Thursday, July 8th | Left Foot Forward

    […] remuneration policies which have only encouraged excessive risk-taking’. On Monday, Left Foot Forward reported how the new deal on capping bonuses would change the financial sector, and the role Labour […]

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