Barnier Risks Lawmaker Backlash Over EU Bonus-Curb Loopholes

Michel Barnier, the European Union’s financial-services chief, will be quizzed by lawmakers today on the bloc’s enforcement of banker bonus curbs, amid warnings that lenders may have too much scope to sidestep the measures.

Barnier must win over legislators in the European Parliament who haven’t ruled out brandishing their right to veto draft technical rules published earlier this month for determining which bank staff should be hit by a ban on bonuses greater than twice fixed pay.

“The parliament is concerned that there are loopholes and wide exemptions in the draft rules which could mean some staff earning more than a million euros ($1.4 million) would not be covered,” Arlene McCarthy, a vice president of the assembly’s Economic and Monetary Affairs Committee, said in an e-mail. The parliament “is currently considering whether or not it can accept the draft rules.”

The EU agreed on legislation last year that would restrict bonuses, a move lawmakers said would prevent excessive payouts for the gambling culture blamed for triggering the 2008 financial crisis. The European Commission, of which Barnier is a member, earlier this month published draft technical standards to flesh out the ban on awards of more than twice fixed pay, which is set to apply starting next year.

The technical measures will determine which bank staff should be considered “material risk takers,” and so face the bonus limit.

Shareholder Permission

The EU rule also requires shareholder approval for any bonuses larger than fixed salaries.

Societe Generale SA, France’s second-largest bank by market value, yesterday became the first among Europe’s leading investment banks to formally seek such investor consent. The Paris-based lender tabled a motion ahead of its May 20 annual shareholders meeting.

“The bonus cap has been highly contentious, and a number of banks have looked at ways of reducing its impact on overall pay, which seems to be what the European Parliament wants to clamp down on,” Andrew Stanger, a partner at law firm Mayer Brown in London, said in an e-mail.

Under Barnier’s plan, bankers “earning over 500,000 euros, who are not otherwise caught, may be excluded from the cap if their bank determines that they have no material impact on the bank’s risk profile,” Stanger said.

Prior Approval

Where the banker earns more than 750,000 euros, prior approval for an exemption must be obtained from the lender’s regulator, such as the Bank of England in the U.K. The European Banking Authority must be informed in advance in cases involving bankers earning more than 1 million euros.

Parliament members are assessing whether to reject Barnier’s proposals and to urge the commission to make changes clarifying the definition of material risk taker, Philippe Lamberts, a Belgian Green member of the parliament, said in a telephone interview.

Under that plan, the commission would then present a revised standard that would be acceptable to legislators. The parliament only has the power to reject or approve Barnier’s plan, not to amend it.

Start Date

The parliament is examining if such a step is possible “without delaying the start” of the bonus limit next year, said Lamberts, one of the architects of the underlying legislation.

Barnier will today hold his last scheduled hearing with lawmakers on the committee before the assembly adjourns ahead of May elections.

One loophole “could potentially mean that up to 10,000 employees would be out of scope” of the bonus limit, McCarthy said. “If the new bank remuneration rules are to be effective, we must ensure all those who take risk to make profits are covered.”

Legislators are also concerned that the tight timetable before the elections could deny them the opportunity to properly vet the draft technical standards, Sharon Bowles, the chairwoman of the committee, said in a phone interview.

While parliament is entitled to a three-month scrutiny period, the approaching elections mean that “the maximum time we’ve got is six weeks,” Bowles said.

The same problem applies to draft technical standards for fleshing out other parts of the EU’s banking rulebook, Bowles said.

The draft standards proposed by the commission are in line with the basic legislation setting out the bonus curbs, Chantal Hughes, a spokeswoman for Barnier, said in an e-mail.

The measure would “implement faithfully” the intentions of the EU law, she said.

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