Bankers Brace for Final EU Bonus Rules as EBA Draws the Line

  • Regulator to give criteria for identifying fixed, variable pay
  • EBA will elaborate on possible exemptions to remuneration rule

Banks in Europe are about to find out exactly where regulators draw the line between fixed and variable pay as they try to negotiate the world’s toughest bonus rules.

The European Banking Authority plans to issue final guidelines next week on what constitutes variable remuneration subject to the European Union’s restriction on bonuses of more than twice fixed pay. The regulator is clarifying the rules after many banks, particularly in the U.K., turned to giving employees cash allowances depending on seniority, known as role-based pay, to evade the bonus limit.

The London-based EBA will also “elaborate on some exemptions” that it “considers could be introduced for small and non-complex institutions meeting specific criteria,” the regulator said on Thursday. The EBA has said that “specific exemptions” from the pay rules could make sense for banks that don’t “rely extensively on variable remuneration” and staff who “receive only a low amount” of variable pay.

EU lawmakers adopted strict bonus rules to clamp down on the gambling culture they blamed for triggering the 2008 financial crisis. Royal Bank of Scotland Group Plc and HSBC Holdings Plc were among British banks that responded with allowances. The EBA shot these down in October 2014, finding that in most cases these discretionary payments were neither fixed nor permanent, and were therefore subject to the bonus limit.

‘Bad Policy’

HSBC granted 13 executives a total of 1.9 million pounds ($2.8 million) in shares for the fourth quarter, led by investment-banking chief Samir Assaf, as lenders sidestep regulatory limits on bonuses.

Andrew Bailey, chief executive officer of the Bank of England’s Prudential Regulation Authority, said on Nov. 17 that there’s evidence European bankers’ fixed pay has risen in response to the bonus rules. Bailey renewed his criticism of the cap, which he called “a piece of bad policy, because it creates the wrong incentives.”

On the issue of whether smaller banks should be captured by the pay rules, Bailey said the question is “how far the European Commission particularly wants to push this down so that it’s the same framework applied to small firms and big firms.” There’s more consensus “outside the European authorities, or the European Commission anyway, that going against the principle of proportionality is a bad thing,” he said.

The British Bankers’ Association has lobbied against applying the rule to small lenders, arguing that doing so is “disproportionate” and may “undermine smaller banks’ ability to hire new staff.”

The EBA said in March that it would recommend legislative amendments to the European Commission, the EU’s executive arm, that “would allow for a broader application of the proportionality principle” where pay is concerned. The commission says the rules must be applied to all institutions.

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