Following an agreement reached with the European Parliament, the Council, as expected, has recently formally adopted 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. The Council’s decision was taken by QM, the UK voted against it. Hence, the cap on bankers’ bonuses will be introduced despite UK’s opposition. The European Parliament has already rubber stamp the political agreement during the April plenary session. Consequently, the legislative package soon will be published in the EU Official Journals and enter into force. The new rules will apply from 1 January 2014.
From the outset, the UK Government has been against the introduction of EU legislation imposing caps bankers' bonuses. But, at the European Parliament insistence, the cap on banker’s bonuses has been inserted into the proposals. 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. This clearly shows the power of the European Parliament, which was able to influence the Council and to change the outcome of negotiations. 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.
The other member states ruled out introducing significant changes to the compromise deal reached with the European Parliament on limiting bankers' bonuses. The UK has won minor concessions but the main issues have not been further addressed. The Government has particularly raised concerns over the application of the EU proposals to limit bankers' bonuses to banks outside the EU. However, there was no support, among the other member states, for this and, consequently, the UK has won no concessions. In fact, the Council confirmed, “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.” The new 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 a EU bank but based outside Europe.
The Member States agreed “Bonuses will be capped at a ratio of 1:1 fixed to variable remuneration, i.e. no greater than equal to fixed salary.” 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. It was also confirmed “For the purposes of applying this ratio, variable remuneration may include long-term deferred instruments that can be appropriately discounted.”
Moreover, it was agreed, “The EBA will prepare guidelines on the applicable discount factor, taking into account all relevant aspects, including inflation rate, risk and appropriate incentive structures.” According to the Wall Street Journal and the Financial Times, the European banking authority (EBA) has announced it will widen regulations to subject more bankers to limits on their bonuses. The Financial Times pointed out, “Pay experts estimate that the EBA’s move to change the definition of material risk-takers will multiply the number of affected staff by up to 10 times at some of the smaller investment banks and three to four times at larger ones.” EBA recalled that “The final comprise on the Capital Requirements Regulation and Capital Requirements Directive (CRR/CRD) provides a mandate for the EBA to set out qualitative and quantitative criteria for the definition of material risk takers, also called “identified staff”.” According to EBA’s proposed quantitative criteria, “staff should be identified as material risk takers if: their total remuneration exceeds, in absolute terms, EUR 500 000 per year, or they are included in the 0.3 % of staff with the highest remuneration in the institution, or their remuneration bracket is equal or greater than the lowest total remuneration of senior management and other risk takers, or their variable remuneration exceeds EUR 75 000 and 75% of the fixed component of remuneration.”
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.
It was also a Government’s priority to apply the cap as late as possible. This was the small concession made to the UK. The draft directive will enter into force in January 2014 but it was agreed “The first bonuses to be affected will be those paid in 2015 in respect of performance in 2014.” Hence, the new rules will only apply after next year’s bonus season.
Due to QMV, the UK has been outvoted and force to accept such measures against the 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 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. 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. 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.
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.
