The cap is off! London to do away with the restrictive EU bonus cap for traders
For Britain to be able to continue to lead the world of institutional financial technology innovation, the cap on earnings must go
The impending exit from the European Union by the United Kingdom has enabled London’s financial markets epicenter to once again become self-determining.
The similarities between the Square Mile’s leading edge institutional financial technology, trading infrastructure and its number 1 position internationally as the largest financial markets center for the world and Europe’s non-producing continent of archaic business practices and socialism could best be described as complete polar opposites, therefore it is no surprise that London’s financial giants are poised to remove some of the counterproductive anti-business measures that had been imposed by tweed jacketed Brussels bureaucrats.
One such restriction is the cap on the bonuses awarded to traders at Tier 1 banks, the rationale for its introduction having been as part of an attempt to diminish awards for risky trading behavior post financial crisis.
Whilst the ideology may have been sound enough, the reality of the imposition of such a cap on bonuses has, as with most anti-business legislation, been more damaging than useful.
The rules imposed by the European Commission are that bonuses must be limited to double the fixed salary for what are considered to be risk takers, as well as those earning more than the equivalent of 500,000 Euros per year.
One of the downfalls of anti-free market legislation is that it creates an environment in which businesses are restricted, and talent moves on elsewhere in order to fulfill their potential without being shackled by legislation.
Ironically, it is a Spanish bank, based in one of Europe’s least financial markets-orientated nations – Spain – that has highlighted the difficulties of having to navigate laws that curb bonuses for traders.
Executives at BBVA had last week expressed concern that a bonus cap of this nature is preventing the company from hiring good quality and highly experienced executives from the technology sector, as well as preventing it from acquiring financial technology startups which specialize in moving the banking sector forward.
London is a financial technology center for the entire world, and the ability for its banks to continue a quarter-century old tradition of continuing to innovate institutional technology is vital.
Britain’s government has made substantial steps toward clearing the path for FinTech development by establishing London as a world center for new initiatives, as well as providing tax credits for companies that commit a certain amount of their resources toward research and development, as explained in detail by FinanceFeeds recently. In effect this is completely the opposite of the restrictive methodology applied by the European Union.
The cap on bonuses was introduced in 2014, and former Conservative Chancellor of the Exchequer George Osborne, the same government official that market out London as the financial technology development capital of the world, challenged this cap in court in Europe, however overturning such bureaucracy from such a heavyweight authority is not an easy task.
Instead, the exit from the European Union by Britain will make matters very easy indeed in terms of removing the rule under its own jurisdiction.
The one downside of passing a law to remove the cap would be that under European law, there are ‘equivalence rules’ which stipulate that if Britain repeals any aspect of the European bank directive, then business terms with Europe are no longer equivalent which means that single market access may be affected.
Does this matter? Not really. Far too much furore has been expressed over maintaining terms with Europe and capitulating to draconian legislation, when there is no reason for a powerhouse such as Britain, within which all of the world’s Tier 1 banks reside, providing top quality liquidity to the entire world.
Instead, Britain can continue to do what it does best – raise its bar and seek continual innovation in order to maintain its top position, its trade partners being the all important and highly advanced APAC region, North America and Australia, all of which are leading the way, rather than being part of Europe’s outmoded and moribund economy.