Banks to be stopped from paying fixed allowances
THE FIXED allowances which some banks used to get around the EU’s bonus cap are set to be banned under proposals published yesterday.
Britain’s government failed in its bid to get the bonus cap scrapped, and now the banks’ own efforts to continue paying have also failed.
The cap limits bankers’ bonuses to the same level as their salaries, or double that level if shareholders agree.
Banks and the UK authorities objected, arguing that it is important for banks to be able to pay flexibly, slashing pay in bad years and hiking it when profits are big.
But the UK lost the battle. As a result, banks started to pay fixed allowances, installments which were more closely related to the banker’s role, and counted as fixed pay, but which could be scrapped more easily that salaries if necessary.
However, the European Banking Authority rejects this as counter to the spirit of the rules: “Remuneration is either fixed or variable; there is no third category,” it said yesterday.
Britain’s prudential regulation authority at the Bank of England had opposed the cap, and viewed the allowances as the “least worst option.”
It is urging banks to respond to the consultation in the hope that this will limit the change to the rules.
The cap could also apply to smaller institutions.
Previously the rules were implemented in a way which only covered major banks. But the consultation is looking to extend it into other areas such as asset management, as well as to smaller firms.
Lawyers believe this could mean the end of the commission-based pay models at firms such as small stock brokers and boutique advisory businesses.
“Small stock brokers are a classic commission model – they take home what they earn. They could become subject to the cap, a deferral period of bonuses and so on,” said Ashurst’s Rob Moulton. “Every regulated firm will have to look back and see how to pay differently.”
“I suspect the UK will keep losing the battles, and will have to accept that pay constraints are something you have to do in the EU.”