Banks gear up to battle European Banking Auth­ority over bonus cap

Tim Wallace
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European commissioner Michel Barnier is going head-to-head with Bank of England governor Mark Carney over bonuses
Banks in Britain, Germany, Swe­den and the Netherlands are preparing for another legal battle over bon­uses, as the European Banking Auth­ority (EBA) considers banning them from paying fixed allowances to staff.

The firms’ lawyers are adamant that paying a regular allowance in cash or shares, based on the recipient’s role and reassessed annually, does not count as a bonus and so is allowed under the EU directive.

Regulators at the Bank of England are also confident that this is allowed, and the Treasury is already fighting a legal battle to have the bonus cap scrapped altogether.

If the banks fail to stop the new rule, they face hiking base rates of pay – increasing their costs every year, regardless of performance, and likely leading to thousands of redundancies the next time the economy slows down.

As a result, a legal showdown with the European authorities is likely.

Brussels’ bonus cap came into force this year, limiting them at the same level as salary, unless shareholders agreed to bonuses of double salaries.

Although most bank staff are not affected, top performers are typically paid large bonuses when they land major deals. If they cannot be paid well enough, they can move to banks elsewhere – Barclays has warned that it had struggled to retain star executives in the US, until it increased pay.

The EBA is understood to be considering banning the fixed allowances as they break the spirit of the bonus cap. Representatives for the regulator, which is headquartered in London, were unavailable for comment yesterday.

European commissioner Michel Barnier this month wrote to the EBA to push it to rule against the allowances. “It is important to show a collective, proactive stance on this important matter and address the claims made that the spirit – if not the letter – of union law is being disregarded,” he wrote, asking for a response by the end of September.

The British authorities declined to comment, but are known to back the allowances. Mark Carney called them “sensible” in August.

“I do detect a pressure to increase fixed remuneration at the expense of variable bonus,” said Andrew Bailey, head of the Bank of England’s prudential regulation authority, earlier this year.

“It raises two concerns. Firstly, it risks reducing the ability of banks to cut remuneration and therefore build capital, and secondly, it risks creating the wrong incentives.”

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