BOE’s Bailey Says Bad EU Bonus Policy Drives Allowances

Bank of England Deputy Governor Andrew Bailey said banks that give discretionary payments to executives are responding to a “bad policy” -- the European Union’s bonus cap.

The European Banking Authority said this week that 39 banks in EU countries are using “role-based” or “market-value” allowances, which they classify as fixed remuneration. “In most cases,” these payments on top of base salary violate the bloc’s ban on bonuses of more than twice fixed pay, according to the EBA.

“Let me be blunt: the bonus cap is the wrong policy, the debate around it is misguided, and the best thing I can say about allowances is that they are a response to a bad policy,” Bailey said in a speech in London late yesterday. “They are not a good solution.”

Royal Bank of Scotland Group Plc and HSBC Holdings Plc are among European banks that have given employees role-based allowances depending on seniority. The EBA gave national regulators to the end of the year to ensure that lenders change their pay structures.

“We need a system where senior people who are responsible for the performance of their firms understand that for a reasonable period of time a meaningful proportion of their remuneration is at risk of being taken away,” said Bailey, who’s also chief executive officer of the Bank of England’s Prudential Regulation Authority.

‘Appropriate Incentives’

Bailey defended tough proposals on bonus clawbacks and criminal liability rules for senior managers at banks.

“It dismays me to see a debate which is at times so divorced from the heart of the matter, which is setting appropriate incentives by putting a meaningful amount of pay at risk,” he said.

The BOE prefers clawing back bonuses rather than capping them. Under the BOE’s pay requirements, bankers could also be forced to pay back bonuses as long as seven years after they’re awarded if they exceed their risk limits or break financial-conduct rules.

“The British banking industry has made great strides in recent years to reform the way in which highly paid staff are remunerated,” the British Bankers’ Association said in an e-mailed statement. “Any move which increases fixed costs and reduces the ability to use these tools which U.K. regulators have rightly put in place in recent years seems counterintuitive.”

‘Senior Figures’

The BOE and Financial Conduct Authority are planning an overhaul of standards for bank managers that would see executives made criminally liable for reckless behavior that results in the failure of the institution, the central bank said in a statement in July. Under the supporting legislation introduced last year, a person could be jailed for as much as seven years for this offense.

HSBC Holdings Plc director Alan Thomson quit the U.K. subsidiary’s board in protest at the proposed rules last week.

“Is it really unreasonable to expect the most senior figures to assume responsibility?,” said Bailey. “Not in my view, and in my experience not in the view of those who take on these roles.”

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