Martin Flanagan: Banks still don't get it so MEPs' bonus bite is a welcome signal

Published on Wednesday 7 July 2010 14:53

THE European Union, never enamoured of the more feral reaches of Anglo-Saxon capitalism, reacted with even more fury than the US and Britain to the banking industry's march to perdition festooned with bonus cheques.

So it was unsurprising yesterday that EU politicians approved arguably the world's toughest curbs on bank cash bonuses, citing the damage done to wider society by cavalier bank risk-taking to generate those payouts.

The European Parliament voted overwhelmingly for a clampdown from the beginning of next year that will see only 30 per cent of bankers' bonuses paid upfront. The cap on immediate payout for very large bonuses will be 20 per cent.

The remaining 70 per cent of the bonuses will be deferred for up to five years, and be linked to the continuing performance of the bank. EU finance ministers are set to rubber-stamp the Draconian changes next Tuesday.

It is even tougher than the regulatory changes to the British banking bonus structure brought in by the Financial Services Authority, whereby 40 per cent of a bonus can be paid upfront and 60 per cent is in shares and deferred for three years.

The FSA is now studying the EU ruling to see if further changes are needed, but it looks like individual governments will have leeway on deciding what constitutes very large bonuses and what the deferral periods for bonuses are.

As EU internal market commissioner Michel Barnier said yesterday, the EU's action sends a strong political message to the banking industry that in the wake of the sector cataclysm which tumbled the world into recession there can be no return to "business as usual".

This is welcome. Banks have had two years to get their act together on bonuses and persuade society that they are as much concerned with lending responsibly and stabilising the macro-economy as their own pay and perks.

They've not done it with the rigour the man on the Leith omnibus would recognise. Hence the EU's iron fist. The voting figures on the clampdown are vivid.

A total of 625 members of the EU assembly voted in favour of the new law compared with just 28 against.

The new rules will also force banks in the EU area to set aside more capital against repackaged securities on their balance sheets. That is also welcome.

It was the sliced-and-diced camouflaged risk of complex securities packages linked to defaulting US home loans that brought the whole deck of cards down and exposed the sham prudence at the heart of the banking system.

And yet there is still evidence that significant swathes of the industry still don't "get it", with salaries and bonuses as a proportion of revenues not falling, and in some cases rising.

Regarding remuneration, banks are not butterflies and they are not being broken on the Brussels wheel. The EU's action is forceful and justified.

Amazon bombshell could hurt Ocado's plans for flotation

The just-announced new Amazon grocery website in the UK is a bolt from the broadband for online grocery group Ocado's forthcoming 1 billion flotation.

Ocado's float is already contentious because many analysts believe it is too-highly priced. But the entry of the mighty Amazon from the US into the British market makes it even more difficult to value the British company.

Amazon has said it will sell more than 22,000 products, ranging from household brands such as Kraft and Procter & Gamble to niche products like ethnic foods.

This will undoubtedly step on the lossmaking Ocado's toes. Things get even more uncertain for investors deciding whether to buy into the Ocado flotation when they have to assess the likely rising onlice grocery challenge to the company in the coming years from the likes of Waitrose and Marks & Spencer (perhaps even Morrison's in a millennia or so).

Amazon is a more clear and present danger, the American giant already selling groceries online in America and just launched in Germany.

The only current silver lining for Ocado is that Amazon says its new UK grocery website has no plans to offer the one-to-two-hour delivery window that the established British online grocery retailers do.

Even so, the obvious danger for anyone assessing the Ocado float is that online retailing as a sector is set to expand sharply in the coming years, and perhaps in ways we yet can't quite see.

This makes trying to work out the prospects for one company in terms of sales and profits several years out extremely difficult.

Ocado's public listing looks more than ever one only for risk-comfortable investors. It ain't for cyberspace widows and orphans.

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