Why is the UK’s title as ‘the financial centre of the world’ under threat from EU legislation?

July 30, 2013 5:47 pm

EU Legislation

The Capital Requirements Directive (CRD) has sparked controversy amongst financial players and politicians following a proposal of cutting remuneration, which is said to be the strictest limits on payouts in Europe.

The directive forms part of the CRD IV package which was implemented in July 2011 to address various issues that took part in the financial collapse. The aim of the package is to create a more stable and secure financial system.

Effective from January 2014, the cap on banking bonuses means that bonuses cannot exceed 100% of the individual’s annual salary, however, the bonus can be extended to 200%, if there is a majority shareholder approval.

European Commissioner Michel Barnier alluded to financethe key role ‘unlimited bonus pools’ played in the 2008 financial crisis; limiting liquidity and driving the banking sector further into debt.

26 finance ministers are in strong agreement with the directive. A general consensus emerges from the EU that such a measure is necessary to protect the taxpayers from once again carrying the financial burden of banking misdemeanours.

The provision is said to tackle risk takers i.e. bankers who invest in high risk endeavours in order to produce a high return for shareholders and in turn, set themselves up for high bonuses.  The provision would reduce such risk in the banking sector and reduce the danger of a credit bubble.

Concerns in the UK

George Osborne the UK’s Chancellor of the Exchequer, however, is in opposition with the 26 finance ministers. He stated that the directive, which is overtly targeted at the UK as a leading financial hub, will have a ‘crippling ability’ on UK banks to compete. The once performance-driven industry will weaken. UK Bankers will no longer have an incentive to strive for high returns, thus failing to maximise growth in the finance sector.finance

There are fears exceptional and talented bankers, who potentially are important assets to the UK economy, will relocate to other Global financial hubs such as Hong Kong and New York where there are no regulations or limits on bonuses.

Mayor of London, Boris Johnson voiced similar concern. He argued the provisions to be ‘deluded’ and ‘self-defeating’ as other financial hubs are advantaged whilst the UK suffers.

Conservative politician Vicky Ford commented that salaries will rise in order to compensate the cap, meaning the provision is counter-productive.

In short, the UK will no longer stand as a worthy global player once the competitive nature of the banking system is reduced. The position as leading financial hub will not prevail as shareholders, banks and businesses alike will entrust money to banks abroad, as to ensure a higher return.

Whilst the aim of the directive can be applauded for taking strong steps to regain confidence and ensuring financial safety in Europe, the effect would stunt the growth of the financial services in the UK.

So long as other financial centres outside of Europe allow bonuses to remain unregulated, the UK’s financial position is very likely to be in jeopardy. A global, rather than European, co-operation to standardise behaviour is the only means to implement the directive whilst eradicating the threat to the UK’s title as financial centre of the world.

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