As expected, the Economic and Financial Affairs Council has recently endorsed an agreement reached with the European Parliament on the proposals amending the EU's rules on capital requirements for banks and investment firms, the so called revised capital requirements rules (CRD IV), intended to transpose into EU law the Basel 3 agreement.
Last May, the Council agreed on a general approach giving therefore a mandate for the EU presidency to start negotiations on behalf of the Council with the European Parliament. The draft proposals are subject to the ordinary legislative procedure, and QMV is required at the Council. Unsurprisingly, the behind closed doors trilogue meetings have been fully used so that a first reading agreement could be reached as soon as possible.
The UK Government has been against the introduction of EU legislation imposing caps on bankers' bonuses. However, during the negotiations, the European Parliament has demanded limits on the size of bankers’ bonuses to be included in the proposals. The MEPs wanted to restrict any banker’s bonuses to no more than their fixed annual salary. After several trilogues meetings, representatives from the European Parliament, the Council and the Commission reached a compromise deal on the proposals and the MEPs were able to introduce to the package limits on the size of banker’s bonuses. It is important to stress that the cap on banker’s bonuses has been inserted into the proposals at the insistence of MEPs. Thus, the outcome of the trilogue clearly shows the power of the European Parliament, which was able to influence the Council and to change the outcome of negotiations. It should be recalled that under the ordinary legislative procedure, the European Parliament is on equal footing with the Council, and a Commission legislative proposal only becomes law if both of them approve it. The European Parliament can make changes to the Council common position that make a substantial difference to the content of the legislation. The MEPs can accept, amend or reject the content of a legislative proposal. They have therefore a stronger negotiation position as it can use its right of rejection to negotiate compromises with the Council. Hence, individual member states, can be outvoted not only by other member states in the Council, but also by the European Parliament through the ordinary legislative procedure. Hence, the ordinary legislative procedure as well as QMV have been weakening the democratic nation state; Britain has been forced to accept EU measures which it was against. And now, the UK is set to be outvoted in such important issue to the City of London.
Under the compromise deal, bankers’ bonuses cannot exceed their annual salaries. They agreed that bankers’ bonuses should be limited at a 1:1 ratio to salary, which can rise to 2:1 with explicit shareholder approval. Hence, there would be only one exception to this rule, which would allow bonuses of up to twice annual salary, if this has been authorised by at least 66% of shareholders owning half of a bank's shares, or, if there is no quorum, it is supported by 75% of shareholders present. According to a press release issue by the Council “For the purposes of applying this ratio, variable remuneration may include long-term deferred instruments that can be appropriately discounted.”
Financial institutions across Europe will be subject to the new rules, including 8,000 banks which presently operate in Europe. David Cameron has said, "We have major international banks that are based in the UK but have branches and activities all over the world. We need to make sure regulation put in place in Brussels is flexible enough to allow those banks to be competing and succeeding while being located in the UK,". However, under the agreement reached by the MEPs and the EU’s presidency, “These provisions will also apply to the staff of subsidiaries of European companies operating outside the European Economic Area and the European Free Trade Area.” Hence, such rules would apply to all European banks’ regardless they are based in or outside the EU. The bonus cap would apply to bankers employed by an EU bank but based outside Europe. It seems the EU’s bankers’ bonuses cap will apply to top-ranking staff at banks.
Brussels has been warned that by introducing such measures it would put at risk Europe’s finance industry competitiveness. The City of London, the biggest EU’s financial capital, will be particularly hit. In fact, 90% of those that would be affect by the EU’s bonuses cap are based in London. Hence, there are serious concerns that the new rules will put the City of London at a competitive disadvantage, as they will apply to European banks globally, but their global competitors will face no bonus restrictions outside the EU. Consequently, such rules are likely to lead to banks and staff to move from London to other financial centres outside the EU. The strict limits, proposed by the EU, on the bonuses paid to bankers might undermine the City as a global financial centre. In fact, one might consider the proposed bonus cap as an “attack” on the UK.
It is important to mention that Roland Rudd, chairman of Business for New Europe, said, “Even I, as a pro-European, am against an EU cap on bankers’ bonuses”. He noted, “The most likely result will be that banks move senior traders out of London. As the FSA is unlikely to tolerate businesses being run remotely, this may in turn lead to the complete relocation of the businesses they run outside of London.” He then stressed, “This local solution to a global problem will only harm Europe’s great financial centre, the City of London.” Moreover, Andrew Bailey, from the Prudential Regulation Authority, has also slammed the EU’s plans. According to The Financial Times, he said “The European Union’s planned bonus cap is likely to drive up fixed salary costs at the big UK banks by £500m annually”, it “could undercut efforts to improve risk management at the UK arms of large overseas institutions”, and “undermine the system of bonus clawbacks for misbehaviour and poor performance.” Furthermore, the EU’s plans are also likely to “undermine the UK’s recent efforts to force overseas banks to improve oversight and risk controls at their London operations.” According to Mr Bailey, the EU bankers' bonus cap, “It will reduce the discipline in the system but it won’t reduce overall remuneration”.
It has been reported that the law firm Shearman & Sterling has concluded that the proposed rules on bankers' bonuses breach EU law. According to the Financial Times, they believe, “…that a mandatory provision fixing the maximum salary-bonus ratio payable in the banking sector not only contravenes European law because the EU lacks the requisite competence to legislate on issues relating to pay, but may also violate the constitutions of certain member states, such as Austria, Germany and Poland.” In fact, Article 153 (5) TFEU states “The provisions of this Article shall not apply to pay, the right of association, the right to strike or the right to impose lock-outs.” Hence, this provision does not allow Brussels to regulate pay in the member states. However, the European Commission as well as the European Parliament said that the bankers’ bonus cap is not a social policy but a prudential financial measure and it does not regulate total pay.
The government is against the EU decision to cap bankers’ bonuses. The Chancellor of the Exchequer, George Osborne, said he could not support such measure, as "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". However, he was unable to scrap the bonus cap from the proposals. It is now, as Michel Barnier, the European commissioner for financial regulation, said “crystal clear” that the cap will be imposed. Only Britain has opposed the agreement reached with the European Parliament, which introduced the EU’s rules on bankers’ bonuses. George Osborne was, therefore, unable to gather support to water down the EU’s rules on this issue. It is important to note, as above-mentioned, that David Cameron has particularly raised concerns over the application of the EU proposals to limit bankers' bonuses to banks outside the EU, which could threat the national interest. The EU rules will also apply to bankers working for European banks outside the EU. Hence, one of the UK Government’s priorities has been to change the scope of the rules. However, there was no support, among the other member states, for this and, consequently, the UK has won no concessions. It is also a Government’s priority to apply the cap as late as possible. However, it remains to be seen whether the Government would be able to postpone the implementation date, as it seems that the bonus cap is expected to enter into force in January 2014. Hence, the new rules will apply to the 2014 bonus season. As there are other member states interested, it might be possible to postpone the implementation date to July 2014 as in this way pay restrictions would only apply after next year’s bonus season. The UK might get minor concessions on “technical details” on how the pay cap will be implemented.
The Council has mandated the Permanent Representatives Committee (Coreper) to conclude negotiations with the European Parliament on outstanding technical issues, so that a deal can be reach by the end of March. However, there is limited room for negotiation on technical issues, as the European Parliament, as well as the Commission and the other member states are unwilling to “reopen the package.” It has been pointed out that during the negotiations of the proposals amending the EU's rules on capital requirements for banks and investment firms, Britain as well as other Member States has won concessions on other elements of the package, therefore they are unwilling to risk what has already been achieved. It is important to recall that last May, George Osborne has dropped his opposition to the package as the UK has won assurances that it could implement the Vickers banking reforms. Nevertheless, the package fails to adequately transpose the Basel agreement as it has been softened at Germany and France request. According to Vicky Ford, MEP "The UK has got all of its other issues delivered on, such as flexibility to apply the retail ring fence for banks and many other issues to help the wider economy". Then, she stressed, "But we can't have everything." One can therefore say that the EU decision-making is a horse-trading bureaucratic procedure, with no democratic debate, whereby policies are adopted not because of their merit or benefit to member states but for the sake of reaching an agreement benefiting the EU as a whole. The EU decision-making process entails compromises, lowest common denominators and “one-size-fits-all” solutions. Obviously, very often, in fact, it is impossible for a common policy to fully satisfy all national interests, hence negotiations take place in order to find the common denominator that best satisfies most national interests. Because of Brussels strive to reach compromise solutions among member states and with the European Parliament, the UK is either outvoted or forced to accept by consensus damaging measures, sacrificing in this way the national interest. Due to QMV, the UK has been outvoted and being force to accept measures against the national interest.
The EU officials are expected to complete “technical” work before Easter so that the proposals can be adopted as soon as possible. George Osborne said, “I can’t support the proposal currently on the table, but I hope that if we make progress over the next couple of weeks that we can have a package that we can all support, that the finance minister of the largest financial sector in Europe can support wholeheartedly.” However, as above-mentioned, the other member states have already ruled out introducing significant changes to the compromise deal reached with the European Parliament on limiting bankers' bonuses. The MEPs have to agree to any of the Council's technical changes and they have already made clear that the agreement reached at the trialogue is not up for revision. The Government is, therefore, unable to protect national interest.
The package still needs to be formally adopted by the Council and by the European Parliament, but the compromise reached with the European Parliament is pretty much a done deal, as the MEPs have already said that there is no “backsliding.” The EU Finance Ministers are expected to conclude and approve the final deal on Capital Requirement Directive (CRD IV), including banker's bonuses in April at latest. The European Parliament is likely to vote on the draft proposals during the April plenary session (15-18 April).
The legislative proposals amending the EU's rules on capital requirements for banks and investment firms will be adopted by a qualified majority vote, hence the UK cannot veto such proposals. There is a support of a qualified majority of member states in favour of the compromise deal agreed with the European Parliament on the reform of rules on capital requirements for banks. Hence, the UK has no chances of forming a blocking minority, and, consequently, it would be outvoted. As all member states but the UK support the legislative package, there would be no vote and probably no further discussions at Council level. The Council of Ministers adopts the decisions prepared by Coreper either without debate, when an agreement has already been found ("A" item), or with debate (“B” item). As regards “A points” there is no vote at all as the agreement was reached by Coreper therefore the Council presidency simply mentions that they have been adopted. As regards “B points” usually the Presidency notes that the required majority has been achieved. Hence, if any Member State objects the act is adopted without the Council formally voting.
It has been reported that Wolfgang Schäuble, German finance minister, said that he would like the package to be adopted by consensus, meaning with the support of all member states. In fact, we have been told that most of the time the Council decides by consensus. When consensus cannot be reached, QMV is used to overcome situations of stalemate in the Council. Wolfgang Schäuble is trying to address some of the UK’s concerns through negotiation on the so-called “technical details”, in order to persuade the UK to sign up to the final deal. However, we already now that the UK’s main concerns would no be further negotiated. Hence, the main question would not be whether the UK has agreed to the proposal but whether it has been forced to agree to it. The Government may state its positions in a formal statement made at the end of the vote, in order to voice reservations or to 'clarify' its decision to oppose or abstain. However, as Bill Cash noted, “We can express reservations and argue against the proposals, but the qualified majority voting system operates in such a way as to prevent us from exercising our much-vaunted influence.”
In the EU decision-making process, the common interest prevails over national interests. The text ultimately adopted takes into account the EU interests as a whole, which in this case, as well as many others EU’s proposals, jeopardizes the UK national interest.
It is important to note that the Government’s power to influence EU legislation is very limited due to QMV. Presently, the UK only enjoys 8% of the votes. From November 2014, QM will be calculated according to double majority: 55% of EU Member States (15 Member States) and 65% of the EU’s population, and the UK will enjoy 12% of the votes. However, this can hardly be seen as an increase in the UK's voting power as it will be harder for the UK to block proposals. The UK is not always able to form political alliances to stop damaging legislation, which is clearly showed by the proposed cap on bankers' bonuses.
The UK has been continuously either outvoted or driven into a forced consensus. Hence, because of QMV, as noticed by Juliet Samuel, in the CityAM, “the UK faces the prospect of losing control over its bank regulations despite being home to Europe’s biggest financial centre.”
The Financial services industry accounts for 12% of UK GDP. Yet, the financial services regulation belongs to the internal market and it is therefore subject to QMV and co-decision with the European Parliament. There is a EU’s ‘power grab’ over regulation of the British financial services industry. A EU supervision of the financial system has been in place since January 2011. The aim is to establish a single EU rulebook applicable to all EU financial institutions and powers have been transferred from national financial supervisors to the new European Supervisory Authorities. Consequently, the powers of the Financial Services Authority (FSA) have been reduced. In December 2011, David Cameron took the historic decision to veto changes to the EU Treaties, on the grounds that the deal was not in Britain’s interests, as it did not contain safeguards to protect the single market and the UK financial services. David Cameron's proposed safeguards were not accepted, the other Member States, particularly Germany and France, have made clear that they would never accept an opt-out for the City of London from EU financial regulation as well as to give the UK a veto over financial services regulation. It is important to note that Christian Noyer, Bank of France governor has recently said to The Financial Times “We are not against some business being done in London but the bulk of the business should be under our control.”
There is a EU tendency to legislate continuously on financial services matters. In fact, we have been seeing a shift of financial regulation from the UK to the EU, and bit-by-bit EU regulation would be taken over from national regulation, and this would be irreversible. The situation will exacerbate with the creation of a banking union. The chances of the UK being able to influence EU’s policies and legislation would be even more limited not only because of the QMV but also because of “solidarity” among eurozone member states, which would vote as a block outvoting the UK in matters of national interest.
Once a banking union is in place, the Commission, under the single market umbrella, will propose banking and financial regulations, for all EU member states. The eurozone member states, as well as other member states participating in the banking union, will vote as a block, imposing further regulations on the City of London. Due to QMV the UK would be outvoted by the eurozone countries on matters of extreme importance, such as financial regulations. The eurozone member states can use their voting power at EU level to force through measures in detriment of the UK’s national interest. The UK would see itself in the position of having no choice but to accept legislation without having the chance of negotiate it.
Hence, Britain’s future is dependent upon rejecting Qualified Majority Voting, whereby Britain has been forced to accept EU measures, which it was against, as well as the Ordinary Legislative Procedure, which represents a dangerous invasion of the sovereignty of the UK Parliament. These issues can only be addressed by renegotiating all the EU Treaties and the whole relationship with the EU, and give people a say in a referendum. David Cameron announced in his big speech “The next Conservative Manifesto in 2015 will ask for a mandate from the British people for a Conservative Government to negotiate a new settlement with our European partners in the next Parliament” and then he promised to give the British people a referendum “with a very simple in or out choice. To stay in the EU on these new terms; or come out altogether.” Britain must regain control of the City of London. Hence, as soon as David Cameron renegotiates the whole UK relationship with the EU the better. In fact, as Bill Cash has been saying, “we need a referendum, and ahead of the European elections in 2014….”
