Osborne fights EU bonuses clampdown

The European Parliament agreed last week that bonuses should be capped at a year’s basic salary, and the Irish government said today that these plans were likely to be approved by EU finance ministers meeting in Brussels.

But speaking in the Belgian capital, Mr Osborne said he could not back the changes. “I cannot support the compromise that is on the table,” he said.

“It will push salaries up, it will make it more difficult to claw back bankers’ bonuses when things go wrong. It will make it more difficult to ensure that the banks and the bankers pay when there are mistakes, rather than the taxpayer.”

Mr Osborne was echoing fears that restrictions on bonuses could lead to a rise in basic salaries, which are not based on performance.

The government argues that it is already taking action to deal with dangerous risk-taking in the financial sector, by splitting retail and investment banking.

The chancellor did not win the backing of any other minister at the meeting. Irish Finance Minister Michael Noonan said: “There is very little further we can do for them because we pushed the negotiations to quite a degree and we got the best possible compromise with the parliament. So there isn’t any more room left really.”

Ireland, which holds the rotating presidency of the EU, helped negotiate the deal. Under this deal, bonuses could rise to twice yearly salary with shareholders’ approval.

Theat to London

Mr Osborne also opposes the plans because he fears London, Europe’s financial centre, could be adversely affected, with an exodus of staff to rival financial centres outside the EU.

If he fails to persuade others that they should be dropped, they will come into force at the beginning of next year.

The changes target senior managers and key risk takers, such as traders – not the average member of staff. They apply to employees of EU banks, whether they are based in the EU or not.

Michel Barnier, the European commissioner in charge of financial regulation, said the plans were designed to crack down on the sort of risk-taking that led to the 2008 financial crisis.

‘Enough is enough’

“Some bankers took ever greater risks because they were being paid from an unlimited bonus pool,” he said. When the risks created a crisis, indeed a disaster, it was the taxpayer that had to carry the can. Enough is enough, we have to put a stop to that.”

Switzerland, which is not in the EU, has backed curbs on bankers’ bonuses in a referendum.

Last week the Federation of European Employers questioned whether a Europe-wide curb on bankers’ pay exceeded EU powers.

‘National interest’ defence

EU officials in Brussels are speculating that Britain may try to invoke a little-used “national interest” defence to block a majority agreement.

The so-called “Luxembourg compromise” allows a member state to block a majority decision if an issue is deemed to seriously affect “a very important national interest”.

Critics of the plans say if they go through, banks will be forced to pay staff bigger basic salaries. They also warn that senior executives will be more likely to choose to work in New York than London.

Under pressure

British banks are under pressure to show restraint when it comes to bonuses. On Friday, it was revealed that Lloyds, which is 39 per cent owned by the taxpayer, had lost half a billion pounds as a result of mis-selling scandals, but was rewarding staff with a bonus pot of £365m (an average of £3,900 per employee).

Chief Executive Antonio Horta-Osorio was awarded a bonus of £1.5m in shares, deferred for five years and dependent on the company’s performance.

RBS, in which the taxpayer has an 82 per cent stake, lost £5.2bn in 2012, while staff received £600m in bonuses. The bank was also caught up in mis-selling and Chief Executive Stephen Hester waived his £963,000 bonus.

Barclays‘ profits plunged to £264m last year, with mis-selling a factor again. Bonuses of £1.85bn will be paid to staff (an average of £13,000 per employee), but Chief Executive Antony Jenkins will not take his entitlement.