Anthony Browne on the EU banker bonus cap | British Bankers’ Association | Video

Transcript

UK banks are bracing themselves for contentious European rules that will take effect in 2014 to limit bonus payments. Anthony Browne, CEO of the British Bankers’ Association, talks about the impact such legislation would have on the UK’s banking industry, as well as on remuneration practices worldwide.

World Finance: Anthony, these new European Union rules: what effect will they have on bonuses?

Anthony Browne: The trouble with the bonus cap is two-fold. One is that it impacts the financial stability of the system. It goes against the financial stability board guidelines that actually, remuneration regulation should be counter-cyclical rather than pro-cyclical. So, what I mean by that is that the bonuses are a way that banks control their pay bills, their wage bills, overall. In the downturn, they don’t have to cut jobs, they just reduce peoples’ pay by reducing the bonuses. If you have very strict bonus regulation like the bonus cap, then they can’t do that, and the only way they can then cut costs in the downturn is by cutting jobs. And that means those people aren’t there when the business comes back again. You have to start going out and trying to hire new people, but they’ve all gone off and done other things. So it’s actually pro-cyclical, it makes the swings and roundabouts of the financial cycle more extreme, which is why it goes against global international regulation, and why most of the global regulators do not support this at all.

“The owners of the banks didn’t have as much control over pay as they should have had. But the answer to that is not to have pay set by international regulation”

The second thing is that it doesn’t encourage the sort of behaviour that you want. There was a big problem with pay, absolutely. People were paid too high amounts, often they were rewarded for taking excessive short-term risks with other people’s money, and when they blew up, they didn’t get the money back. The danger with capping bonuses is, you limit the ability of banks to actually reward the sort of behaviour that they want to encourage. And all the previous regulation on bonuses had been encouraging more of it to be paid in shares, in longer-term instruments, having claw-back so that if things go wrong then you can claw the money back. And this goes against all that.

And the other fundamental principle that it goes against, which the UK and other governments have been trying to encourage, is that the shareholders of banks, the people who own the banks, should ultimately be the ones that determine the pay of the banks. And actually, the bonus cap again goes against that.

It’s obviously true that the shareholders, the owners of the banks, didn’t have as much control over the pay in the banks as they should have had. The answer to that though is not to have pay set by international regulation, but rather to give the owners of the banks, the shareholders, the powers that they need in order to make sure that they have remuneration policies that they want in the banks they own.

World Finance: It has been discussed that bankers are being paid too much, so do you think the argument that banks are just trying to retain the best talent really stands up?

Anthony Browne: There clearly has been an issue of excessive pay in the banking sector. The pay levels were too high for what people were actually doing, the incentives were wrong. People were being paid for taking very big short-term risks that then blew up, and they kept the bonus.

“It affects banks wherever they operate around the world. So an EU bank operating in New York will be constrained by the bonus cap”

But banking is a globally competitive industry. On the international banking, not necessarily the retail banking, but there is a pool of talent that moves around the world. London is competing with New York, with Hong Kong, with Singapore, with Tokyo, and there are global levels of pay there. And one of the things that’s happened is that the average pay in wholesale banking is actually far less now in London at almost all levels of an organisation than it is in New York or Hong Kong. And the banks are increasingly finding it difficult to recruit the talent to London, because of concerns about pay levels here and things like the bonus cap.

The other thing is that it’s international in scope. So it affects UK banks wherever they operate around the world. So an EU bank operating in New York will be constrained by the bonus cap in trying to attract talent, but any other bank – whether it’s an Asian bank or an American bank – working in New York, doesn’t have the same constraints. And it is already making it difficult for European banks to attract new talent operating in New York, because people don’t want to go there because they see this legislation coming down the line.

World Finance: You did touch on this, but these EU rules will probably affect London more, because this is where the majority of the big bonus-paying banks are based. So, how different is the banking industry here compared to Europe?

Anthony Browne: The overwhelming majority of those affected by the incoming bonus cap operate in London. Not just UK banks but actually international banks operating in London, often EU banks who have their wholesale operations here as well as American banks and Asian banks. And the reason for that is that London is a global financial centre, the likes of which Europe doesn’t really have elsewhere. The banks in London, the business deals being done in London, are on a global basis for global corporations operating in global wholesale financial markets.

“Badly thought-out regulation and legislation can really affect the status of financial centres”

The other financial centres in Europe tend to just be local or regional financial centres, that don’t operate globally in quite the same way. And the impact on that is on pay levels, because you’re then competing in a global financial market. And that’s why, actually, if you’re an ambitious banker from Germany or France or Italy, then more likely than not you’ll come and work in London and work in the banks here, because you’ll be operating at a higher global level than you would be if you were working in your home financial markets.

World Finance: So how do you see the future of the banking industry in the UK?

Anthony Browne: I think the danger of the future of London as a financial centre is regulatory over-reaction. I’m not saying we’re there yet, I don’t think anyone thinks the bonus cap itself signals the end of London at all. But if there is a lot more different things like this that damage competitiveness, then as we’ve learned from mistakes made in other countries, not least the US, that actually, badly thought-out regulation, legislation, can really affect the status of financial centres. We’re not there yet with London, but there are elements that are definitely unhelpful.

World Finance: Anthony, thank you.

Anthony Browne: Thank you.