Bankers who earn more than 1 million euros ($1.4 million) won the chance of a reprieve from European Union bonus curbs as regulators published a blueprint to implement rules on rewards for irresponsible risk-taking.
The plans set out which bankers should be covered by EU requirements that ban bonuses of more than twice fixed pay. While the restrictions will automatically hit some employees including senior managers and staff able to take significant investment decisions, the European Commission offered a path to exemptions for others.
The EU agreed on rules last year that would restrict bonuses, a move lawmakers said would prevent excessive payouts for the gambling behavior blamed for triggering the 2008 financial crisis. While the U.K. government challenged the caps as illegal, today’s proposals risk provoking a backlash from the European Parliament, which led demands for a clampdown on bankers’ pay.
The criteria “are too lax especially at a time when shareholders don’t have enough control and bankers aren’t exercising restraint,” Philippe Lamberts, a Belgian lawmaker in the EU assembly, said in a telephone interview.
The draft standards will make it more difficult for bankers to evade the bonus curbs than if the EU had stuck with existing guidance on who should be covered by pay rules, the commission said.
They “will provide clarity on who new EU rules on bonuses actually apply to, which is key to preventing circumvention,” Michel Barnier, the EU’s financial-services chief, said in an e-mailed statement.
Under the draft standards, bankers would be subject to the bonus caps if they meet one of a set of “qualitative criteria” relating to their role and decision-making powers, the commission said.
Employees would also be covered if their pay surpasses one of several numerical thresholds, including if their total compensation is more than 500,000 euros per year, the commission said. Other such criteria include if someone is in the top 0.3 percent of earners in the bank or if their pay is equal or greater to “the lowest total remuneration of senior management and other risk takers,” the commission said.
Still, bankers covered only by the numerical thresholds may win exemptions “under very strict conditions and always subject to supervisory review,” the commission said.
According to the commission plan, national regulators would need to give prior approval for any such exemption for a banker earning 750,000 euros or more, while the European Banking Authority would also need to be notified in advance in the case of carve outs for bankers earning more than 1 million euros.
In each case, “the burden of proof will rest squarely on the institutions to demonstrate that, despite the very high remuneration, the staff member in question does not in fact have any material impact on the institution’s risk profile,” the commission said.
European Parliament lawmakers and national governments have one month to raise concerns about today’s proposals, as part of a scrutiny exercise that could then be extended for a further two months.
Members of the EU parliament haven’t yet had a chance to discuss and coordinate their position on the draft standards, Lamberts said.
Given the flexibility handed to financial regulators, “I urge them to exercise this power with caution and err on the side of preventing excessive risks,” Arlene McCarthy, a U.K. member of the parliament’s socialist group, said in an e-mail.
“Regulators need to have in place robust criteria for assessing risk so that nobody falls out due to weak oversight. They must ensure that they have genuinely captured all risk takers within their criteria,” said McCarthy, the parliament’s lead legislator on a previous round of EU bonus rules.
The draft standards are targeted at ensuring that all “material-risk takers” are hit by the pay curbs, according to the commission. The criteria are tougher than the ones currently used in the EU, meaning more bankers would be caught by the bloc’s bonus rules, it said.
The pay rules took effect on Jan. 1, meaning that the limits will apply for the first time to bonuses awarded in 2015 based on 2014 performance.
The EU already has legislation in place requiring parts of banker bonuses to be deferred, paid in shares and able to be recouped.
“Some banks are doing their utmost to circumvent remuneration rules,” Barnier said. “The commission will remain vigilant to ensure that new rules are applied in full,” he said.
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