White & Case Research Reveals Fears That Politically Motivated and Poorly Thought through Bonus Cap Will Lead to Reduced Flexibility, Higher Costs and Greater Likelihood of Redundancies
Global law firm White & Case LLP has published research in which financial institutions from across the globe heavily criticise the EU's proposed bonus cap (CRD IV) as politically motivated and poorly thought through with key deficiencies that have potentially serious and damaging consequences.
The report, which includes a foreword by Michael Percival, Director of the Association of Financial Markets in Europe, can be downloaded here: Shooting in the dark: A review of the implications of the bonus cap.
The survey of financial institutions in the UK, EU states, Switzerland, the United States, Canada and Japan reveals a strong consensus that the cap is politically motivated and poorly thought through. While the rationale for CRD IV is understood and there is an acceptance that bonus structures can be improved, the industry does not believe the cap was well planned and is concerned about potential hazards to implementation caused by a lack of clarity from regulators.
London-based White & Case Partner Nicholas Greenacre, who led the research, said: "The financial institutions we spoke to view CRD IV's underlying raison d'être negatively and, when it comes to implementing the required processes to be compliant, feel they are very much shooting in the dark."
Participants in the research were particularly concerned that CRD IV's move away from variable pay will reduce flexibility, increase fixed costs and increase the likelihood of redundancies in a downturn.
"What was remarkable was not only the consensus that CRD IV is not good legislation, but also that it doesn't meet its aims and intentions – that it's fundamentally not fit-for-purpose," said Nicholas. The conclusions in the research include:
1. CRD IV is politically motivated and poorly thought through.
2. Banks accept (reluctantly) that bonus structures can be improved, but feel that this process was heading in the right direction under CRD III.
3. Banks feel there's no point fighting CRD IV, regardless of its shortcomings.
4. Banks see the main battle as attracting and retaining the best talent within the parameters of the new legislation.
5. CRD IV may lead to a hire-and-fire culture in downturns.
6. Fixed remuneration will increase; salaries, generally, will not.
7. Local employment law combined with different interpretation of legislation by national regulators is a challenge; clawback is fine in principle but largely unworkable in practice.
8. Potential for US and Asian banks to win competitive advantage if they retain flexibility on pay and incentives.
For more information please speak to your local media contact.