Britain suffered a long-expected political defeat on Wednesday when it failed to stop European Union countries waving through a cap on bankers' bonuses, an EU law that will hit London hardest. Corporate largesse is under attack across Europe with Switzerland earlier this month voting to impose some of the world's strictest controls on executive remuneration amid public anger at Wall Street-style excess in company boardrooms.
But capping bonuses at the level of base salary represents a setback for Britain - home to the EU's largest financial centre - and, for some, underscores the country's waning influence in the EU. Earlier this year, British finance minister George Osborne tried to change the new rules but none of his EU counterparts supported him. Britain could not veto the rules on its own.
A spokeswoman for the rotating EU presidency, currently held by Ireland, said ambassadors from member states had reached a qualified majority agreement on the rules. The bonus caps are one element of new regulations to strengthen banks' balance sheets and prevent a repeat of the taxpayer bailouts that have fuelled public anger at the sector. Other measures include increasing the level of capital and liquid assets held by banks and are part of the new framework to introduce internationally agreed rules known as Basel III. Some members of the European Parliament are also seeking to extend bonus curbs to fund managers but these have not yet been agreed.
On Wednesday the cap for banker bonuses received the support of 26 EU countries - all members except Britain - at a meeting of the bloc's ambassadors. A referdendum this month in Switzerland - which is outside the European Union - voted 67.9 percent in favour of allowing shareholders to veto executive pay proposals and banning big rewards for new and departing managers.
Britain's Osborne opposes the bonus caps which he says would weaken rather than strengthen banks by forcing them to raise fixed salaries to retain staff. While the rules are set to be introduced as early as January 2014, the provisions for bonus limits will impact payouts made only in the following year. The rules should make it harder to make large payouts such as the bonus worth more than 17 million pounds cashed in this week by Rich Ricci, the head of Barclays' investment bank.
The strict limits have already been slightly eased by allowing bonuses of twice base salary if shareholders agree, but are nonetheless the toughest in the world. They will also apply to the staff of European banks operating outside the region. Bankers willing to wait longer than five years for some of their payout could slightly exceed the two times salary limit. Up to a quarter of a banker's bonus can be paid in such long-term intruments as share options, bonds or other non-cash payments which can be cashed in after five years. The European Parliament is set to formally endorse the new rules in April.