The European Parliament last week endorsed a skeleton law for the first EU-wide curbs on excessive pay in the banking sector from January 2011.
The Committee of European Banking Supervisors (CEBS), a panel made up of financial watchdogs from each member state, is the body that conducted the banking stress tests in July. It must now flesh out the practical details of the banking pay measures. The panel concluded a two-day meeting yesterday evening to draft guidance for banks and supervisors to implement the new rules, such as by defining some of the generic terms used in the law.
The basic rules force banks and investment firms to list staff who have a material impact on the company’s risk profile. The list should include at least senior management, risk takers, staff engaged in control functions and any employee whose total pay package, including pension, takes them into the same pay package as senior management.
The rules also specify that a “substantial portion of the variable remuneration component, such as 40 to 60 per cent” should be deferred over an “appropriate period of time”. The exact percentage and timescale have been left for CEBS to agree, and reports yesterday said the rules would be at the stricter end of the scale.
THE MAKE-UP OF BONUSES
The European Parliament also said a “substantial portion” of an employee’s non-fixed pay should consist of shares or equivalent, and that guaranteed bonuses should be banned. CEBS is now expected to say bonuses should be no greater than a certain multiple of a salary, with built-in flexibility for national regulators to allow less risky firms to award bigger bonuses. And also, those deemed crucial to the economy could be more heavily regulated.
EUROPEAN SUPER REGULATOR
CEBS is also thought to have discussed the introduction of the three-branch European super-regulator, which will eventually replace the CEBS body. A law introducing the watchdog passed through the EU Parliament last month. The London-based body will have the power to overrule domestic regulators such as the Financial Services Authority.
WHAT HAPPENS NEXT?
Once CEBS publishes its decisions, which are expected today or early next week, it will consult with affected parties for one month before making a final proposal. CEBS has no power to stray beyond the framework laid down by the European Parliament last week, and the final rules must get the thumbs up from the European Commission. This process also allows for challenges from member states and the European Parliament, so there is scope for further argument.
Once in place, the remuneration curbs will be reviewed by the European Commission on or before 1 April 2013.
CEBS is set to be replaced by the new super-regulator as early as this January.
WHAT OTHER RULES ARE IN THE PIPELINE?
The European Parliament is currently trying to finalise the Alternative Investment Fund Managers Directive, which will impose extra checks on hedge funds operating within the bloc. On a global level, the Basel III capital rules governing banks also face final approval at the G20 summit in November.