Calls for restraint have been ignored too long - this bonus culture has to end

Regulation of bonuses is just one part of a sweeping reform that will make our banking sector more stable, says Sharon Bowles MEP

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Last week the Royal Bank of Scotland paid out a shocking £679 million in bonuses, despite racking up a loss of £5.1bn this year. Meanwhile Lloyds Chief Executive Antonio Horta-Osorio is set to receive a whopping £1.5 million bonus, even though his bank recently posted a loss of £570 million. Both banks have received billions of pounds of taxpayers' money in government bailout since the onset of the financial crisis.

But it is not just these two banks which are at fault; calls for restraint have been repeatedly ignored by bankers across the City. The current system continues to incentivise overly risky behaviour, posing a threat to financial stability, while rewarding failure and leaving the taxpayer to pick up the bill when things go wrong. This bonus culture has got to end.

This week EU Finance Ministers have been debating a proposal by the European Parliament to cap bankers' bonuses at one year's salary, with the possibility to double that amount if approved by shareholders. Some on the eurosceptic right have tried to frame this as an attack by Brussels which would undermine the competitiveness of the UK's financial sector. But the arguments being wheeled out against the cap simply do not stand up to scrutiny.

Firstly, the threat of bankers relocating to avoid the cap has been grossly exaggerated. The cap will only apply to a small number of so-called high-risk traders, around 5000 out of the estimated 750,000 people employed in London's financial sector. Moreover, the bonus cap will also cover all key staff who work for European banks across the world, no matter whether they operate in London or Singapore. And with Switzerland having just voted for even broader limits on executive pay for all companies, European bankers are hardly likely to relocate to Zurich.

There are also many good reasons for banks to remain in London, including the city's historical clout and financial expertise, access to the EU and capital markets, a strong legal framework, implicit taxpayer guarantees and the GMT time zone. We should also not discount the excellent lifestyle and cultural attractions offered by what remains a world class city. In any case, if the effect of bonus regulation is to force the introduction of new blood and new talent, instead of the cosy clique that fostered the Libor-rigging merry-go-round, then perhaps that is no bad thing.

It has also been argued that banks will simply sidestep the cap by increasing base salaries. However, there is a limit to how much banks can increase fixed pay without adversely affecting their business. After all, they cannot claw back salaries if they end up making severe losses, and the greater their fixed costs the less they can lend in order to bring in profits. Even if banks do start offering ludicrously high fixed salaries they still have to run it by their shareholders, who won't be overly keen to approve them if this later leads to a sharp decline in their dividends.

It is also important to recognise that the bonus cap is just one small part of a whole swathe of financial regulation currently being implemented by the EU, as part of the globally agreed Basel III framework. On most of these issues, the UK has actually succeeded in getting its own way. And contrary to public perception, in many areas the government has been actively pushing for tougher regulations than those originally proposed. In fact, I helped to broker a deal which will give the UK the flexibility to implement the Vickers recommendations, separating high-street retail banks from their investment arms and helping to ensure that taxpayers do not bear the costs when risky investments fail.

Another key part of the reforms, largely overshadowed by the issue of bankers' bonuses, are the strict new transparency requirements for the financial sector. These will force banks to disclose their profits and tax arrangements in each country in which they operate, both in Europe and throughout the world. This is something I have long campaigned for, and is a major first step in ensuring that all multinational companies pay their fair share of tax and do not stash away their profits in off-shore savings accounts.

Far from being an imposition from Brussels then, the cap on bankers' bonuses is part of a sweeping reform that will make our banking sector more stable, responsible and accountable. Not only is there a moral imperative to address our banks' failings, there are strong rational reasons to do so too. Across the world, the tide is now turning in favour of proper financial regulation. As with so many other issues, Britain and Europe should lead the way.

Sharon Margaret Bowles is a Liberal Democrat politician and Member of the European Parliament. She was a lead negotiator on the Capital Requirements Drive which includes a bonus cap.