The UK faces a showdown with Europe after being found to have breached the directive which introduced a crackdown on bankers’ bonuses.
The European Banking Authority reached the conclusion as the regulator delayed the final guidelines on implementation of the rules across the EU by a year to January 2017. It proposed a change to EU law to bring clarity to the treatment of smaller, less risky firms’ bonuses.
Britain could now face a battle with Europe over the cap – which the Bank of England and the UK government oppose – after the EBA found the UK had excluded hundreds of firms such as asset managers and brokers because they were not big enough to come under the EU’s capital requirements directive.
The cap, which limits bonuses for senior staff to 100% of salary or 200% if shareholders approve, is a long-running source of conflict between the UK and the EBA. It affects the UK more than other European countries because London is the continent’s financial centre and hosts many highly paid investment bankers and other financial employees.
Bonuses paid in cash for short-term gains were identified as one of the causes of the financial crisis because they rewarded traders and bank bosses for taking risks that could endanger their company. But the Bank of England has warned that the bonus cap increases risk by encouraging increases in salary and making it harder to claw back bonuses if things go wrong.
James Perry, a partner at the law firm Ashurst, said the EBA’s rules were counterproductive and that he expected the UK to continue to oppose the measure.
“These rules are supposed to be about controlling risk, but firms like asset managers and brokers have very little risk on their balance sheets, so the bonus cap is being used to control risks that really don’t exist. Firms will be forced to pay more fixed salary to compensate for the cap – so the upshot will be to create risk where there was none before.”
Previous rulings by the EBA have already forced changes on pay deals in the City after the regulator said that some top-up payments granted by banks – with the approval of the Bank of England – breached the bonus cap. These payments, often known as role-based pay, can only be excluded from the rule if they are not variable in any way.
The EBA said it would support amending the EU directive to exclude small firms and employees paid bonuses that are insignificant relative to salary but that the cap itself should remain intact. It suggested the rules that require bonuses to be deferred over a number of years and the types of financial instruments in which bonuses can be paid should not be applied to small firms.
Jon Terry, a partner and pay expert at accountants PwC, said the EBA had delayed implementation by a year to get the rules cleared up but that it wanted to do so as quickly as possible within the EU’s often slow processes. He also pointed out that UK bank executives who receive bonuses in shares will not be eligible for dividends, reducing the value of bonuses by up to a quarter.
“It appears current practices will apply for 2016, and the guidelines have simply provided a stay of execution until 2017,” Terry said.
The Bank of England said it noted the EBA’s guidelines but that its views on the bonus cap were unchanged.
A Bank spokesman said: “Firms have increased fixed pay as a proportion of total remuneration, which reduces the flexibility of a firm’s cost base and limits the ability to reduce such costs in adverse market conditions. It also reduces the capacity to use variable pay to incentivise positive risk cultures.”
[Source:- the gurdian]