Europe’s top banking regulator is cracking down on major banks, warning them they should not try to get around the EU’s cap on bonuses by handing their staff extra payments.
The announcement by the European Banking Authority (EBA) has implications for 39 financial institutions, thousands of bankers and risks putting the UK’s already strained relationship with the EU under further pressure. The chancellor, George Osborne, is already challenging the restriction on bonus payouts in the European court of justice.
The announcement by the EBA –which is likely to have an impact on UK banks such as Barclays, HSBC and the bailed-out Royal Bank of Scotland – raises the prospect of thousands of bankers being denied any further top-up payments. The regulator did not name any banks as it published its analysis into the way the industry had implemented the bonus cap, which restricts them to 100% of a bankers’ salary, rising to 200% if shareholders grant their approval.
The EBA found that 39 banks in six EU states started to grant “allowances” or “role based” pay alongside traditional salaries and bonuses. The banks have argued that these should be not be classified as bonuses, or variable pay, as they were not linked to performance.
But the EBA has now published an opinion in which it states that these extra payments cannot be regarded as “fixed” pay and should instead be regarded as “variable” components of pay – which means banks are breaching the ratio set out by the EU.
“It is reverse engineering. Nobody can deny this,” said Isabelle Vaillant, the director of regulation at the EBA.
In the UK, the ratio between variable and fixed pay for the highest paid bankers in the City was 370% in 2012, the most recent year for when the data is available, illustrating the impact that restricting bonuses to 100% or 200% would have on pay deals.
Such allowances have also been used by US banks with significant operations in the City, such Goldman Sachs. Banks based in London but with international operations such as HSBC are captured by the cap for staff anywhere in the world. It has disclosed it is paying allowances to 208 individuals in London and 395 outside the UK. . Stuart Gulliver, HSBC’s chief executive, is receiving £1.7m. His counterparts at bailed-out Lloyds Banking Group, António Horta-Osório, at RBS, Ross McEwan, and at Barclays, Antony Jenkins, are receiving around £1m each.
In its analysis, the EBA said: “Allowances do not promote sound and effective risk management” and could not count as fixed pay.
In a paper issued on Wednesday, the regulator said it was clarifying “that institutions making use of such allowances should change their remuneration policies and reclassify the ratio between the fixed and the variable component so as to comply with the EU legislative requirement”.
It called on national regulators to ensure the banks they regulate were in compliance. This does not mean that changes will be made immediately as the EBA’s opinion is not legally binding and further guidelines on pay are expected from the EBA later this year.
Andrew Bailey, the top regulator at the Bank of England’s regulatory arm, has criticised the bonus cap for potentially pushing up salaries by up to £500m a year and has described allowances as the “least bad outcome”. Given these previous remarks it is believed unlikely that Bailey, who sits on the board of the EBA, would endorse the latest opinion from the European regulator.
Osborne is challenging the original legislation in the European court of justice and a decision could come next year. A Treasury spokesperson said: “We expect to receive the EBA’s guidelines on this issue in due course, which will then be subject to public consultation.”
The EBA faced pressure from the outgoing EU financial markets commissioner Michel Barnier to review the way such allowances were being used. He tweeted: “I welcome the EBA’s findings on bankers’ allowances. Existing rules must be implemented properly: important signal to the rest of society”.
Banks in the UK put the remuneration policies - and plans to pay allowances - to a shareholder vote at this year’s annual meetings. All received the support they asked for. Robert Talbut, the chief investment officer at Royal London Asset Management, warned the report from the EBA “was not a good outcome”.
He tweeted: “EU banning of allowance in banking pay is misguided and is only likely to inflate salaries and fixed costs further.”
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