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Britain Isolated as E.U. Ministers Support Bonus Caps Europe’s Finance Chiefs Reject British Move to Ease Caps on Bank Bonuses
(about 4 hours later)
BRUSSELS — The British government stood isolated on a key European Union issue Tuesday, after finance ministers from elsewhere in the bloc rejected London’s effort to water down proposed limits on bankers’ bonuses. BRUSSELS — The British government stood isolated on an important European Union issue Tuesday after finance ministers from elsewhere in the bloc rejected its effort to water down proposed limits on bankers’ bonuses.
The ministers, taking up rules provisionally approved last week by representatives of the European Parliament and member states, broadly agreed Tuesday to cap bonuses at no more than twice the level of salaries for bankers working in the 27-nation Union and for those working for European-based banks worldwide. The ministers did, though, leave the door open for further concessions that could bump some bonus awards slightly higher. The ministers, taking up rules provisionally approved last week by representatives of the European Parliament and member states, broadly agreed on Tuesday to cap bonuses at no more than the annual salary for bankers working in the 27-nation European Union and for those working for European-based banks worldwide. The ministers left the door open for further concessions that could permit some slightly higher bonuses.
The bonus caps, which would require formal approval by a majority of E.U. member states, among other steps, are aimed at reining in the risky, but potentially high-reward, behavior that contributed to the financial crisis. British officials and bankers have warned that the bonus limits could make it more difficult to keep London, Europe’s main financial hub, competitive with financial centers like New York, Singapore and Hong Kong. The bonus caps, which are subject to formal approval by a majority of member states, among other steps, are aimed at reining in the risky, but potentially high-reward, behavior that contributed to the financial crisis.
During the ministers’ meeting in Brussels, George Osborne, the British chancellor of the Exchequer, told his colleagues that the measure could have the “perverse” effect of pushing up fixed salaries, making it harder to punish bankers for bad investments or ethical lapses by “clawing back” their bonuses. British officials and bankers have warned that the limits could make it harder to keep London, Europe’s main financial hub, competitive with financial centers like New York, Singapore and Hong Kong.
But facing almost certain defeat over the issue, Mr. Osborne struck a conciliatory tone, saying he would endorse the rules “if we make progress in the next couple of weeks.” During the ministers’ meeting here on Tuesday, George Osborne, the British chancellor of the Exchequer, told his colleagues that the measures could have the “perverse” effect of raising fixed salaries, making it harder to punish bankers for bad investments or ethical lapses by revoking their bonuses.
The rules are drafted so that a banker working in New York for a British bank like Barclays would be subject to the rules, as would a banker in London working for a U.S. bank like Citigroup. Only if a bank’s shareholders approved could a bonus be higher — and even then it would be limited to no more than double the salary. But facing almost certain defeat on the issue, Mr. Osborne struck a conciliatory tone, saying he would endorse the rules “if we make progress in the next couple of weeks.”
British officials, speaking on the condition of anonymity, said their government would seek to increase the allowable limits on some types of bonuses given in the form of stocks or bonds that would vest in the future. But the legislation is expected to pass mostly in its current form, as long as a majority of member states approve. The rules are drafted to apply to a banker working in New York for a British bank like Barclays, and to a banker in London working for an American bank like Citigroup.
“It looks like the key points will hold,” said Philip Davies, a partner in London at Eversheds, a law firm. He predicted that the bonus cap would put the City, London’s financial district, at a competitive disadvantage to banking hubs like Wall Street and Hong Kong. “The long-term effect on the City remains to be seen.” he said. “But as it now stands, alternative jurisdictions that are able to offer more favorable terms look to have a significant recruitment edge.” A bonus could not be higher unless the bank’s shareholders approved, and even then it could not exceed twice the salary.
Banks are fretting how the proposed caps on bonuses would affect them, according to several legal experts that are advising firms based in the City. Some are even seeking legal advice over whether the European officials have the authority to limit bonuses. British officials, speaking on condition of anonymity because they were not authorized to discuss the issue publicly, said their government would seek to raise the limits on some types of bonuses given in stocks or bonds that would vest in the future. But the legislation was expected to pass in close to its current form.
While no bank appears to be ready to take the issue to court, experts say such a move would remain a possibility as long as questions about how the bonus caps will work remain unanswered. “It looks like the key points will hold,” said Philip Davies, a partner in London at Eversheds, an international law firm. He predicted that the bonus caps would put London’s financial district, known as the City, at a competitive disadvantage to banking hubs like Wall Street and Hong Kong.
When Michel Barnier, the European commissioner responsible for financial regulation, was asked Tuesday whether he thought any kind of legal challenge would be successful, he replied, “Good luck.” “The long-term effect on the City remains to be seen.” he said. “But as it now stands, alternative jurisdictions that are able to offer more favorable terms look to have a significant recruitment edge.”
Some financial firms also are looking at ways to devise compensation packages around long-term incentives that would allow bankers to receive sizable compensation despite the new controls. Yet advisers acknowledge that it will be difficult for leading banks to defend any such workarounds, because of the widespread public anger against the industry’s past excesses. Banks are concerned about how the proposed caps would affect them, said several legal specialists who are advising banks based in the City. Some are even seeking legal advice as to whether the European officials are authorized to limit bonuses.
Mr. Osborne’s political foes immediately focused on the E.U.’s rebuke, saying it was a sign that the Conservative government led by David Cameron, which has called a referendum on Britain’s membership in the Union, was increasingly unable to influence policy making in Europe. While no bank appears to be ready to take the issue to court, specialists say that will remain a possibility as long as questions about how the bonus caps will work remain unanswered.
“This government needs to take a crash course in finding friends and influencing E.U. partners,” said Arlene McCarthy, a member of Britain’s Labour party in the European Parliament, who also is a senior member of the chamber’s Economic and Monetary Affairs Committee. When Michel Barnier, the European commissioner responsible for financial regulation, was asked whether he thought any legal challenge would succeed, he replied, “Good luck.”
Ms. McCarthy said she supported the cap as the only way to rein in bankers. But she complained that the Cameron government failed to win more favorable terms for the City “because of a kind of arrogance” toward its partners in the Union. Some financial institutions are looking at ways to devise compensation packages around long-term incentives that would allow bankers to receive sizable compensation despite any new controls. Yet advisers acknowledge that it would be difficult for leading banks to defend such moves, because of widespread public anger over the industry’s past excesses.
Ireland, which holds the rotating presidency of the Union, helped to broker talks on the bonus cap last week with legislators of the European Parliament. On Tuesday, Michael Noonan, the finance minister of Ireland, said there was “now there is very little further we can do for” Britain. Mr. Osborne’s foes called the European Union’s rebuke a sign that the Conservative government led by Prime Minister David Cameron, which has called a referendum on Britain’s membership in the bloc, was increasingly unable to influence policy making in Europe.
“We pushed the negotiations to quite a degree and we got the best possible compromise,” Mr. Noonan said. “This government needs to take a crash course in finding friends and influencing E.U. partners,” said Arlene McCarthy, a member of Britain’s Labour Party in the European Parliament and a senior member of the chamber’s Economic and Monetary Affairs Committee.
To a great extent, Mr. Osborne was in a bind over how strongly to argue for changes. From one side, he was under acute pressure from members of the Conservative party who favor taking a tough line against European rules that they consider at odds with British interests. Ms. McCarthy said she supported the caps as the only way to rein in bankers. But she complained that the Cameron government had failed to win more favorable terms for the City “because of a kind of arrogance” toward its partners in the European Union.
Adding to that pressure is the growing challenge from the U.K. Independence Party, which wants to pull Britain out of the Union. Ireland, which holds the rotating presidency of the bloc, helped broker talks on the bonus caps last week with legislators of the European Parliament. On Tuesday, Michael Noonan, the Irish finance minister, said, “Now there is very little further we can do for” Britain. “We pushed the negotiations to quite a degree, and we got the best possible compromise,” he said.
On the other hand, supporting high pay for bankers is repellent to significant sections of the British electorate, who are struggling in a weak economy. Many voters also resent the banking industry for receiving a series of giant bailouts paid for by taxpayers. Mr. Osborne was in a bind over how forcefully to argue for changes. He was under acute pressure from members of the Conservative Party who favor a tough line against European rules that they consider at odds with British interests.
Mr. Osborne also needed to temper his criticism because the caps were part of a legislative package that included something his government favors: tougher rules about how much capital European banks most hold in reserve to protect against losses. Adding to that pressure was a growing challenge from the United Kingdom Independence Party, which wants to pull Britain out of the European Union.
Mark Scott contributed reporting from London. But supporting high pay for bankers angers significant sections of British voters, who are struggling in a weak economy. Many of them also resent the banking industry for receiving several giant bailouts paid for by taxpayers.
Mr. Osborne also needed to temper his criticism because the caps are part of a legislative package that included something his government favors: tougher rules about how much capital European banks most hold in reserve to protect against losses.

Mark Scott contributed reporting from London.