EU nears cap on banker bonuses, as Osborne holds out

The UK is one of just three countries opposed to the cap.

EU banking reforms are set to impose a limit on bankers' pay, against the wishes of much of the City of London.

The proposal, backed by the democratically-elected European Parliament, would cap bonuses that exceed the recipients salary. France has recently come around to the idea, and, the Financial Times reports, there is now a "clear majority" which is willing to agree to the cap just to get the debate out of the way. The rest of the reforms, which are focused on bank capital ratios, are considered urgent, and there is little desire to hold them up over the pay caps.

The UK, leading those who oppose the pay caps, has suggested that even it is preparing to case on the basic idea, circulating a policy document suggesting reforms which "build on the principle of a cap", the paper reports:

It strengthens current rules enforced in the UK with an absolute ban on upfront cash bonuses that exceed salary and a requirement for bank shareholders to set a cap on variable to fixed pay.

But a ban on upfront cash bonuses is very different from the ban on the entire bonus exceeding salary. That proposed ban can, with a vote from a supermajority of shareholders, be weakened to a 2:1 ratio of bonus to salary, but even that is still a far more restrictive requirement than the one the UK desires.

The British government has reasons for its scepticism. The argument for including bonuses in a bill focused on bank stability is that, when a bonus can exceed the value of one's salary, the incentive to play it safe rather than go for massive short-term profits is reduced. But the UK also makes a compelling argument for focusing just on cash bonuses. Other types of bonus, like front-dated stock options or bonds which vest only if the employer still exists, can be tweaked so as to encourage not only profit but healthy, stable, profit.

In contrast, if the EU's current plan passes, the incentive will be to offer the entire value of the cap in up-front cash. The magnitude of the bonus may thus be shrunk, but its incentive effects could end up being perversely increased.

Nonetheless, politically the economic effects of the bonus cap are likely to be less important than the simple fact of its existence. The banking sector has been seen as overpaid by most of the British public for a very long time now, and if Osborne digs his heels in over what many will see as the right for banks to pay unlimited bonuses, he could find himself even more unpopular than he already is.

That is especially true if the importance of what is being delayed hits home. The capital ratios — which are the main focus of the talks — are widely seen as one of the first post-crisis regulations which could actually have a real effect on the likelihood and severity of future financial crises. By requiring banks to have a certain amount of liquid capital on hand, the move will, it is hoped, prevent the damaging bank runs which ultimately contributed to the recession in 2008. If the Chancellor is seen as holding the economy hostage over the right for banks to pay unlimited bonuses, his image as a canny political operative may be damaged somewhat.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The 11 things we know after the Brexit plan debate

Labour may just have fallen into a trap. 

On Wednesday, both Labour and Tory MPs filed out of the Commons together to back a motion calling on the Prime Minister to commit to publish the government’s Brexit plan before Article 50 is triggered in March 2017. 

The motion was proposed by Labour, but the government agreed to back it after inserting its own amendment calling on MPs to “respect the wishes of the United Kingdom” and adhere to the original timetable. 

With questions on everything from the customs union to the Northern Irish border, it is clear that the Brexit minister David Davis will have a busy Christmas. Meanwhile, his declared intention to stay schtum about the meat of Brexit negotiations for now means the nation has been hanging off every titbit of news, including a snapped memo reading “have cake and eat it”. 

So, with confusion abounding, here is what we know from the Brexit plan debate: 

1. The government will set out a Brexit plan before triggering Article 50

The Brexit minister David Davis said that Parliament will get to hear the government’s “strategic plans” ahead of triggering Article 50, but that this will not include anything that will “jeopardise our negotiating position”. 

While this is something of a victory for the Remain MPs and the Opposition, the devil is in the detail. For example, this could still mean anything from a white paper to a brief description released days before the March deadline.

2. Parliament will get a say on converting EU law into UK law

Davis repeated that the Great Repeal Bill, which scraps the European Communities Act 1972, will be presented to the Commons during the two-year period following Article 50.

He said: “After that there will be a series of consequential legislative measures, some primary, some secondary, and on every measure the House will have a vote and say.”

In other words, MPs will get to debate how existing EU law is converted to UK law. But, crucially, that isn’t the same as getting to debate the trade negotiations. And the crucial trade-off between access to the single market versus freedom of movement is likely to be decided there. 

3. Parliament is almost sure to get a final vote on the Brexit deal

The European Parliament is expected to vote on the final Brexit deal, which means the government accepts it also needs parliamentary approval. Davis said: “It is inconceivable to me that if the European Parliament has a vote, this House does not.”

Davis also pledged to keep MPs as well-informed as MEPs will be.

However, as shadow Brexit secretary Keir Starmer pointed out to The New Statesman, this could still leave MPs facing the choice of passing a Brexit deal they disagree with or plunging into a post-EU abyss. 

4. The government still plans to trigger Article 50 in March

With German and French elections planned for 2017, Labour MP Geraint Davies asked if there was any point triggering Article 50 before the autumn. 

But Davis said there were 15 elections scheduled during the negotiation process, so such kind of delay was “simply not possible”. 

5. Themed debates are a clue to Brexit priorities

One way to get a measure of the government’s priorities is the themed debates it is holding on various areas covered by EU law, including two already held on workers’ rights and transport.  

Davis mentioned themed debates as a key way his department would be held to account. 

It's not exactly disclosure, but it is one step better than relying on a camera man papping advisers as they walk into No.10 with their notes on show. 

6. The immigration policy is likely to focus on unskilled migrants

At the Tory party conference, Theresa May hinted at a draconian immigration policy that had little time for “citizens of the world”, while Davis said the “clear message” from the Brexit vote was “control immigration”.

He struck a softer tone in the debate, saying: “Free movement of people cannot continue as it is now, but this will not mean pulling up the drawbridge.”

The government would try to win “the global battle for talent”, he added. If the government intends to stick to its migration target and, as this suggests, will keep the criteria for skilled immigrants flexible, the main target for a clampdown is clearly unskilled labour.  

7. The government is still trying to stay in the customs union

Pressed about the customs union by Anna Soubry, the outspoken Tory backbencher, Davis said the government is looking at “several options”. This includes Norway, which is in the single market but not the customs union, and Switzerland, which is in neither but has a customs agreement. 

(For what it's worth, the EU describes this as "a series of bilateral agreements where Switzerland has agreed to take on certain aspects of EU legislation in exchange for accessing the EU's single market". It also notes that Swiss exports to the EU are focused on a few sectors, like chemicals, machinery and, yes, watches.)

8. The government wants the status quo on security

Davis said that on security and law enforcement “our aim is to preserve the current relationship as best we can”. 

He said there is a “clear mutual interest in continued co-operation” and signalled a willingness for the UK to pitch in to ensure Europe is secure across borders. 

One of the big tests for this commitment will be if the government opts into Europol legislation which comes into force next year.

9. The Chancellor is wooing industries

Robin Walker, the under-secretary for Brexit, said Philip Hammond and Brexit ministers were meeting organisations in the City, and had also met representatives from the aerospace, energy, farming, chemicals, car manufacturing and tourism industries. 

However, Labour has already attacked the government for playing favourites with its secretive Nissan deal. Brexit ministers have a fine line to walk between diplomacy and what looks like a bribe. 

10. Devolved administrations are causing trouble

A meeting with leaders of Scotland, Wales and Northern Ireland ended badly, with the First Minister of Scotland Nicola Sturgeon publicly declaring it “deeply frustrating”. The Scottish government has since ramped up its attempts to block Brexit in the courts. 

Walker took a more conciliatory tone, saying that the PM was “committed to full engagement with the devolved administrations” and said he undertook the task of “listening to the concerns” of their representatives. 

11. Remain MPs may have just voted for a trap

Those MPs backing Remain were divided on whether to back the debate with the government’s amendment, with the Green co-leader Caroline Lucas calling it “the Tories’ trap”.

She argued that it meant signing up to invoking Article 50 by March, and imposing a “tight timetable” and “arbitrary deadline”, all for a vaguely-worded Brexit plan. In the end, Lucas was one of the Remainers who voted against the motion, along with the SNP. 

George agrees – you can read his analysis of the Brexit trap here

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.