The Bottom Line: If Mr Cable has his way...
While there may have been a sharp intake of breath at the news that the EU has passed legislation capping bankers’ bonuses, my view is that this will have little impact on the investment banking hiring environment. It was pretty obvious soon after the election that the new coalition had softened its stance on banks somewhat and so the new legislation, at least as far as the investment banks are concerned, isn’t really that draconian.
If Mr Cable had his way, all the big banks would be broken up and bonuses would be virtually eliminated - a sure-fire way in my view of guaranteeing an end to the UK’s ability to compete as an international financial centre. Let’s not forget that this is a man who is on record as saying that everyone who works in a bank has an ‘aristocratic lifestyle’ clearly demonstrating his lack of understanding of the sector.
No-one is denying that there needs to be more of a focus on areas such as compliance and risk. Of course regulation is important and that’s just one of the reasons why the banks are recruiting heavily in these departments – risk and compliance are now very high profile areas. It was pretty obvious, therefore, that the legislation was going to tie bonuses to risk. Banks will now have to defer between 40% and 60% of bonuses for between three and five years and only 50% of immediate bonus can be paid in cash – the rest will be paid in shares linked to the institution’s performance.
However, the banks will always find ways of ensuring that they are in a position to attract the best people. Many have already changed their pay structures in anticipation of the legislation and are structuring remuneration around increases in base salaries to enable them to remain attractive to top talent. What’s interesting though is that this isn’t just a gentleman’s agreement between European countries, it’s an actual law - and it’s a much more aggressive stance than other G20 participants.
Interestingly, in the case of the alternative investment markets things could be trickier. It is still not clear if the law will be applied strictly to hedge funds and other alternative investment funds but if it is then it could be disastrous for the capital. London is the European hub for the hedge fund and private equity sectors but it’s also very mobile – firms could easily relocate to offshore locations such as Singapore or Switzerland – taking its talent with it.
My gut feel – and hope - is that the FSA will be mindful of the fact that the Alternative Investment Fund Directive is already in the offing and so will apply the rules in line with that directive. Otherwise we could be looking at a real brain drain out of London and that can only be bad for the financial services sector.