Plans to place strict curbs on bonuses and hedge fund managers have been given the green light by MEPs.
The European Parliament’s Socialist Group of MEPs celebrated a major victory after reaching agreement on legislation in the final hours of the Spanish presidency of the European Union. Labour MEP Arlene McCarthy secured backing from the council of ministers, representing EU governments, as well as the the Commission for the new Capital Requirements Directive (CRD 3).
In the final Parliament vote in Strasbourg on July 7, the directive was approved by 625 votes to 28, despite many Conservative MEPs voting against. European Parliament sources claimed that Chancellor George Osborne had been unaware that a deal was imminent until it had already been agreed.
The directive is a response to the weaknesses in banking practices revealed by the financial crisis, particularly the rewarding of high-risk, short-term investments with massive bonuses, and severely undercapitalised banks. The position taken by Ms McCarthy and the Socialist Group was that banking and investment firm remuneration policies should not encourage excessive risk taking and should be closely tied to the capital strength of their institution.
However, since the recession, banks have actually increased bonus payments by £10 billion, according to the Bank of England’s financial stability report published this June.
The main achievements of the Socialist group include strict limits on upfront cash bonuses to ensure that bonuses are linked to long-term success rather than risk-taking.
The maximum amount of upfront cash allowed for all bonuses is 30 per cent, and 20 per cent for large bonuses of £1 million or more. At least 50 per cent of bonuses must be in contingent capital and shares, must be deferred, and can be clawed back if investments fail, meaning that bonus payments are closely tied to the strength and performance of a bank.
For bailed-out banks, the rules are much stricter. Nationalised banks will be required to prioritise repaying taxpayers and strengthening capital bases.
Furthermore, the example of former RBS chief executive Fred Goodwin walking away from RBS with a multi-million pound pension pot should not happen again under this directive, as the value of large pension payments will also be linked to the strength of the firm. Had this been the case three years ago, Sir Fred’s pension pot would have been a small fraction of what he received.
The legislation will come into force at the start of 2011.
