EU’s Bankers Get Early Christmas Gift With Bonus-Cap Waiver

Bankers in the European Union got an early Christmas present as the bloc’s top banking regulator proposed a way to avoid the world’s toughest bonus caps.

Banks will be able to ask national regulators to exempt staff earning as much as 1 million euros ($1.4 million) from rules that cap bonuses at twice their salary, the European Banking Authority said today. When a banker earns more than 1 million euros, the EBA would have to approve any waiver. Senior managers aren’t eligible for the exemption.

The EU agreed on rules earlier this year that would restrict bonuses, a move lawmakers said would prevent excessive payouts and curb irresponsible risk-taking following the 2008 financial crisis. The U.K. government challenged the caps at the EU’s highest court in September, saying they were illegal.

Today’s draft rules are a step back from the initial proposals in May, when the EBA said that any banker paid more than 500,000 euros should be covered by the caps. Alexandra Beidas, a pay specialist at Linklaters LLP in London, said the earlier rules were “highly contentious.”

“This more flexible approach will be welcomed, although it will bring with it a more complex process for firms already working hard in the run up to Christmas to prepare for the rules before they come into force in the New Year,” Beidas said.

Risk Profile

Banks must show that any excluded staff “have indeed no material impact on the institution’s risk profile,” the EBA said in the policy document today. The rules need approval from the European Parliament, European Commission and EU member states before they become law across the 28-nation bloc.

Philippe Lamberts, one of the parliament’s lead lawmakers on banker bonus rules, warned that the new proposals may face opposition.

“I would advise EBA not to try and second guess the European Parliament if they want to ensure a smooth approval process,” Lamberts said. “We intend both the letter and spirit of the legislation to be fully respected.”

The authority is finalizing a series of rules before it hits an end-of-year deadline. The EBA also plans to publish information on banks’ holdings of sovereign debt, securitized assets and how they calculate their capital buffers on Dec. 16.

More than half of global banks said they would increase salaries to offset the effect of European Union bonus caps, according to a study by human resources consultants Towers Watson & Co. in June.

‘Back Door’

The poll found that 7 percent of those surveyed thought the EU rules would be successful in reducing pay across the financial services industry. About 53 percent said it would result in increased salaries.

“There is no point in bolting the front door when the back door is open,” said Jason Kennedy, chief executive officer of London-based recruitment firm Kennedy Group. “The banks have found different ways and means to pay people to get around the caps.”

The highest-paid bankers in the U.K. had an average bonus-to-salary ratio of 370 percent, the EBA said last month. In France, the ratio was 495 percent.

The caps breach treaties protecting the “rights and interests of employed persons,” the U.K. Treasury said in a statement in September. The EU also gave too much power to the EBA to set the parameters of the bonus caps, according to the Treasury.

U.K. Impact

Britain was home to 2,188 investment bankers earning more than 1 million euros in 2012, the highest amount in the EU, while Spain had 37, the London-based EBA, set up in 2011 to harmonize banking rules in the EU, said in the survey last month. France and Germany had 117 and 100.

“The exemption protects businesses in maintaining top performing employees, who deserve to be remunerated as such, therefore, and more importantly, maintaining talent in here in the U.K.,” Hakan Enver, operations director at recruitment company Morgan McKinley Financial Services.

The Prudential Regulation Authority, the U.K. banking regulator, declined to comment on the waivers.

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