Bank Bonuses That Aren’t Called Bonuses Banned in Europe

Europe’s top banking regulator moved to close a loophole that allows banks to sidestep limits on bonuses by awarding staff payments under different names.

The European Banking Authority said 39 banks in the European Union are paying staff discretionary role-based payments, they classify as fixed pay, in addition to their salaries. These awards break EU bonus rules because they were found neither fixed nor permament in “most cases,” the London-based regulator said in a report today.

EU lawmakers last year adopted the world’s toughest bonus rules in a bid to tackle what they called a gambling culture blamed for triggering the 2008 financial crisis. Royal Bank of Scotland Group Plc and HSBC Holdings Plc have been among European banks responding by giving employees cash allowances depending on seniority, known as role-based pay, to evade the restriction on bonuses of more than twice fixed pay.

“This outcome is at the most severe end of the industry’s expectations,” Tom Gosling, a London-based partner at PricewaterhouseCoopers LLP, said in an e-mail. “There’s a risk that making pay less flexible results in bank pay getting entrenched at current levels, when regulatory, economic and commercial pressures all mean it should continue to fall.”

Discretionary Allowances

HSBC, Europe’s largest bank by market value, was the first lender in the U.K. to reveal its plans for allowances. Lloyds Banking Group Plc and Barclays Plc have also used such rewards.

Banks using discretionary role-based allowances “will be expected to treat them as variable remuneration” and change policies to comply with EU rules, the EBA said.

“Most of the allowances” the EBA investigated didn’t qualify as fixed pay because of their “discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification,” the regulator said.

The EU’s outgoing financial-services chief, Michel Barnier, said he expects supervisors and banks to “take full account” of the EBA’s opinion.

“It will be for the new” European Commission, led by Jean-Claude Juncker, “together with the EBA to subsequently review the situation to consider all appropriate steps to ensure the enforcement of the rules by the member states and supervisors concerned,” Barnier said.

‘Crude Tool’

The EBA said it set a Dec. 31 deadline for authorities to “use all necessary supervisory measures to ensure institutions review their remuneration policies.”

“The EBA has not shut the door completely on role-based allowances, saying that they can be used to form part of fixed pay with appropriate conditions,” Nicholas Stretch, a partner at CMS Cameron McKenna LLP, said in an e-mail. “But the ruling will mean advisers scratching their heads over each award, trying to decide if it falls foul of the EBA’s parameters.”

Britain was home to 2,188 investment bankers earning more than 1 million euros ($1.3 million) in 2012, the most in the EU, while Spain counted 37, according to EBA data. France and Germany had 117 and 100, respectively.

Top U.K. investment bankers were paid an average of 1.95 million euros in 2012, the most in Europe, and had an average bonus-to-salary ratio of 370 percent, according to the survey.

Salaries for senior bankers rose an average of 26 percent in 2012 as banks prepared for bonus caps, the EBA said in a separate report earlier this year, surveying 137 banks across the EU. This signals a “material shift from variable to fixed remuneration,” according to the EBA.

Higher fixed pay “will represent a crippling bill for banks in times of stress,” John Thanassoulis, a professor of financial economics at Warwick Business School, said in an e-mail. “In short, this cap makes banks riskier as it pushes up their fixed costs.”

The U.K. government opposes the bonus caps and has made a legal challenge against them at the EU’s highest court in Luxembourg, arguing that it oversteps the powers laid out in the bloc’s treaties.

“The EU bonus cap is a fundamentally flawed approach,” Andrew Tyrie, chairman of the Treasury Select Committee, said in an e-mailed statement today, calling the measure a “crude tool.” “It will encourage banks to increase fixed pay rather than embed incentive structures that improve standards.”

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