Millions of people from all sections of society have already had their say on the chain of events which saw the global banking system spiral out of control and reach near collapse in 2007/8. There is little doubt that certain organisations and individuals behaved in a reckless and regrettable fashion, contributing to an economic collapse which took us all by surprise with its reach and scale.
We are still feeling the reverberations of the crisis, even though there appear to be green shoots of economic recovery taking place in the UK. But we are all familiar with the global financial crisis and the vocabulary of austerity: credit crunch, quantitative easing and austerity measures are all familiar phrases to most of us now.
Europe, which has been the worst affected area, is still struggling to overcome the challenges left by the crisis. The European dream of fiscal unity has been a nightmare of disharmony for most Eurozone member nations since the crisis broke.
So perhaps it is understandable that the EU is keen to lay the blame at the door of the greedy bankers who started it all; punishing them where it can hurt them most – their wallets. Or so the theory goes.
The EU wants to introduce a cap on banker bonuses. They feel that this is a way to curb their excesses, rein in banker greed and ensure that a fairer and safer banking system develops.
They want to introduce a cap on bonuses that most ordinary workers would love: a 100% of salary limit or a (pre-approved by shareholders) 200%-limit for top bankers. It was standard practice for a City banker to earn the majority of their income via bonuses prior to the financial crisis.
In theory this sounds great: it still offers bankers a fair opportunity to earn a bonus after all. But in practice, it might not work.
How would a cap affect fixed salaries in the banking sector?
Critics of the new proposals suggest that removing the bonus incentive for bankers means that basic wages, or fixed salaries as they are also known, will simply go up as a result. The critics of the proposals suggest that the new rules, if passed, might end up rewarding all bankers, while simultaneously making it easier for poor performing bankers to walk away from their mistakes. Under the current system shareholders and regulators rely on the bonus system to hold bankers to account.
These are the reasons that George Osborne has given in launching a legal challenge to the EU proposals. The Treasury has launched a complaint with the European Court of Justice, believing that tampering with the bonus culture of the city is only likely to make the financial sector more, not less, unstable.
The government’s move is at odds with the general ‘banker bashing’ mood of the British public and, largely, the Conservatives’ coalition partners the Liberal Democrats and Labour.
The issue comes back to trust. Do we trust the banks to regulate themselves where eye-wateringly high bonuses are at stake? Do we want to see fat cat bonuses making the headlines once more in an age of austerity?
The loss of trust in our financial institutions was arguably the most significant aspect of the global financial crisis. The British public lost faith in a banking system which appeared to discourage personal responsibility and reward greed.
The prevalence of bonuses was at the centre of this culture, with the mind-blowing bonuses which were reported capturing the headlines and the discontent of the nation. Nothing illustrated the disconnect between those inside and outside the financial sector more accurately than the issue of bonus pay.
With this in mind, it is important to look closely at the proposed EU cap on bankers’ bonuses and what it may mean for the future of fixed salaries in the sector and the wider UK economy in general.
Why have the coalition taken this position?
At first glance, the coalition’s decision to launch a legal challenge to the proposed cap appears to directly contradict their stated aim of tightening up regulations in the specific sector. However, as a statement from the Treasury pointed out, there is definite method in the perceived madness.
“Britain has been at the forefront of global reforms to make banking more responsible, including big reductions in upfront cash bonuses and linking rewards to long-term success. These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers’ fixed pay up rather than down, which will make banks themselves riskier rather than safer,” said the statement.
Opposition to this position has predictably been swift from certain quarters; with the Labour Party suggesting that it demonstrated that the coalition were keen to stick up for the bankers in suggesting there should be no cap on potential bonuses in place.
However, the stance which Chancellor George Osborne and the coalition have taken appears to hinge on the idea that those within the sector will simply find a way around such a measure by increasing fixed salaries generally.
Such a move would clearly contradict any chance of an improvement in the trust which exists between the UK public and the banking sector, but wouldn’t a failure to control the potential for bonuses do the same thing?
The answer probably hinges on whether or not you feel that the government’s position is a short-term or a long-term stance. In the short-term, a policy which prevents bonuses from escalating out of control within the banking sector would certainly be seen as a good thing. However, if the result is that fixed salaries are adjusted to compensate for this policy over the long-term then it could be strongly argued that such a move is at best naïve and at worst counter-productive.
The UK government would need to feel confident in their ability to regulate bonuses on an ad-hoc basis if they were to prevent such a policy from being put in place.
However, the situation is complicated further by the wishes of those from elsewhere in Europe. The British legal challenge is currently still subject to review, but EU financial services commissioner Michael Barnier expressed his regret to the proposed cap on a recent visit to Britain.
Mr. Barnier told the British Bankers’ Association annual conference in London last week that he remained “confident that the measures are balanced and reasonable” as well as being firmly in the “interests of financial stability”. Barnier also acknowledged the underlying fear that Britain was becoming increasingly isolated from these major decisions, suggesting that he had “no interest” in undermining the UK generally or London’s position as “the largest European financial centre”.
This final point is a particularly pertinent one, with Barnier highlighting the fact that London is a hugely pivotal figure in the way financial affairs are conducted throughout Europe. A number of leading private equity firms, insurance companies and asset management companies have offices in the English capital, in many cases these offices are global headquarters. The financial consequences of this proposal going through would be highly significant for such firms, which is why so many leading financial figures will be keeping a close eye on how the situation plays out.
A decision on the proposal is expected shortly and the result is likely to go a long way towards determining issues such as how the level of trust will progress between the UK public, the government and the banking sector in years to come, as well as what role the banking sector plays in the continuing economic recovery.
So far the recovery has been slow and at times fragile. What impact a major financial decision such as this would have and whether it would contribute towards derailing the hard work that a number of other sectors have carried out to return the UK economy to a position of sustainable growth remains to be seen.
This article was written on behalf of StatPro.
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