Bank of England deputy renews assault on the EU’s plan to cap City bonuses

The EU’s cap on bankers’ ‘bonuses was last night lambasted as “the wrong policy” and “misguided” by the Bank of England’s deputy governor.

Andrew Bailey was speaking a day after attempts to get around the cap – which limits bonuses to 100 per cent or salary, or 200 per cent if shareholders approve – by offering top staff huge role-based “allowances” were ruled to have breached the rules by the European Banking Authority (EBA).

Speaking at Mansion House before an audience of leading City executives, Mr Bailey said: “We need a system where senior people who are responsible for the performance of their firms understand that for a reasonable period of time a meaningful proportion of their remuneration is at risk of being taken away. There is nothing new about this; after all, it is how the traditional [City] partnership system worked. So let me be blunt, the bonus cap is the wrong policy.”

Mr Bailey went on to describe the allowances as “a response to a bad policy”. He is believed to have argued against the EBA’s decision, but he nonetheless tried to make it clear that he is not at all “pro-bonus”.

He explained his view on allowances by saying: “They are not a good solution. I will not win friends in some places for saying this, but it dismays me to see a debate which is at times so divorced from... setting appropriate incentives by putting a meaningful amount of pay at risk.”

The Prudential Regulation Authority, which Mr Bailey heads as part of his role as deputy governor, has pursued a policy of forcing banks to defer bonuses for a long period so they can be clawed back if a banker’s actions are deemed to have harmed their employer.

He said: “Sadly, taking this stance sometimes attracts the criticism of being pro-bonuses. This is not true, and I can say from experience that advocating putting bankers’ pay at risk does not naturally improve my popularity in some quarters.”

He pointed to the conclusions of the Parliamentary Commission on Banking Standards to justify his stance. The commission said: “There are distinct advantages to a significant proportion of banking remuneration being in variable rather than fixed form. It is easier to adjust variable remuneration to reflect the health of an individual bank. The use of variable remuneration also allows for deferral and the recouping of rewards in ways which better align remuneration with the longer-term interests of a bank”.

The bonus cap is now badly damaging Britain’s relationship with Europe, with the Treasury having launched a legal challenge to its imposition.

Britain believes that the move is damaging its financial services industry, with banks complaining that the cap puts them at a disadvantage to international competitors that are free to pay what they want.

Mr Bailey, however, believes that the cap will ultimately increase risk in the banking sector by forcing basic salaries – which can’t be cut in response to financial strain – higher.