City fund managers hammered by new EU bonus rules

New EU rules limiting the cash portion of bonuses will hit London harder than most. Well, possibly...

by
Last Updated: 12 Nov 2010

We imagine few tears will be shed over news that European Union lawmakers have agreed tougher bonus rules for financial institutions: to many, the prospect of a load of hedge fund managers decamping to Switzerland (where they’d be able to fill their boots in peace) will seem like a case of ‘good riddance’. However, others may find the idea of Brussels introducing new rules about how UK private companies pay their staff – apparently against the wishes of the Government – a bit unpalatable. And it’s worth remembering that since 80% of the EU’s fund managers are based in London, these new rules will hit the UK harder than anyone else. Assuming, that is, they can actually be enforced in practice…

Under the new rules agreed by the EU, bankers will only be able to get 30% of their bonuses in cash (or 20% for larger bonuses); the rest will be deferred, with at least half the total to be paid in shares. As Arlene McCarthy, the MEP leading the negotiation, puts it: ‘These tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk taking.’ In other words, the idea is to stop bankers behaving in a way that boost profits in the short term (and hence their pay packet) but is bad for the bank in the long term.

The good news, as far as the bankers are concerned, is that Brussels shied away from imposing a limit on the size of bonuses (and it’ll be up to individual countries to decide what constitutes a large bonus) – which means it’s broadly in line with the G20 agreement. And since UK banks have already been subjected to even tighter bonus restrictions by the FSA, they probably won’t lose too much sleep over this.

The big difference, however, is that the EU rules will (according to the BBC) also apply to fund managers – a huge proportion of which are in the City. If so, you can understand why the Treasury wasn’t keen: even if you don’t buy the conspiracy theory that that this is a Franco-German attempt to clip London’s wings, it certainly hits us harder than anyone else. What’s more, the point of this is a bit dubious. Did hedge funds cause the financial crisis? Not really. Do they enjoy the same kind of implicit taxpayer protection enjoyed by the banks? Not really. Will it stop hedge funds thinking short term? Unlikely. Will regulating the bonuses of these (private) companies prevent future problems? Debatable.

Then again, the caveat to all this is that nobody seems quite sure what these rules will look like when they get to national level – so there could still be a bit of room for manoeuvre. And since one unwanted result of this change may be to drive more of the industry out of the EU and into Asia and the US, perhaps that’s no bad thing.


In today's bulletin:

Sky hikes prices - as BT offers its sports channels on the cheap
City fund managers hammered by new EU bonus rules
Toyota suffers fresh setback with Lexus engine fault
Editor's blog: Time for a woman to run the CBI?
Fatalities at work hit a record low

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today