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Banks face crackdown over EU bonus cap Banks face crackdown over EU bonus cap
(about 7 hours later)
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. Europe’s top banking regulator has warned banks they should not hand their staff top-up payments to avoid the EU bonus cap in a move that could have implications for dozens of banks and thousands of bankers.
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 tougher than expected decision by the European Banking Authority (EBA) also risks putting the UK’s already strained relationship with the EU under further pressure and has rekindled the controversy over whether the bonus cap would actually lead to increases in the salaries of bankers. George Osborne, is already challenging the EU’s bonus rules 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 did not name any banks as it published its analysis into the way the industry has implemented the cap on bonuses, which came into effect at the start of this year and restricts payouts 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 banks such as Barclays, HSBC and bailed-out Royal Bank of Scotland are expected to be hit, along with Wall Street firms with a major presence in the City, such as Goldman Sachs.The EBA found that 39 banks in six EU states started paying “allowances” or “role based” sums alongside traditional salaries and bonuses after the bonus cap was introduced this year. The banks have argued that these payouts are not standard pay and should be not be classified as bonuses because they are 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. But the EBA contradicted this view and said that these extra payments should be regarded as “variable” components of pay, like a bonus, and that banks using them are breaching the ratio set out by the EU.
Among the bosses of UK banks receiving allowances are Stuart Gulliver, HSBC’s chief executive, who is being handed £1.7m while 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.
“It is reverse engineering. Nobody can deny this,” said Isabelle Vaillant, the director of regulation at the EBA.“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. The EBA called on national regulators to ensure the banks they regulate were compliant with the cap by the end of the year. However, 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.
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. The implications for UK banks will also depend on how the Bank of England reacts. Andrew Bailey, the top regulator at the Bank’s Prudential Regulation Authority, has described allowances as the “least bad outcome” of the cap. Given these previous remarks it is believed unlikely that Bailey, who sits on the board of the EBA, would have endorsed the latest opinion from the European regulator.
In its analysis, the EBA said: “Allowances do not promote sound and effective risk management” and could not count as fixed pay. In the UK, the ratio between variable and fixed pay for the highest paid bankers in the City was 370% in 2012 – illustrating the impact that restricting bonuses to 100% or 200% would have on pay deals.
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”. Tom Gosling, head of PricewaterhouseCoopers’ reward practice, said the EBA’s verdict was at the “severe end” of expectations. “As a result of these new rules the vast majority of major banks operating in the EU will need to change their remuneration policies,” said Gosling.
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. Banks in the UK put their remuneration policies to a shareholder vote at this year’s annual meetings. All received the support they asked for and Robert Talbut, the chief investment officer at Royal London Asset Management, warned the report from the EBA “was not a good outcome”.
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.”He tweeted: “EU banning of allowance in banking pay is misguided and is only likely to inflate salaries and fixed costs further.”
Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, warned the cap “will encourage banks to increase fixed pay rather than embed incentive structures that improve standards”.
Osborne is challenging the original legislation in European courts and 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.”
Outgoing EU financial markets commissioner Michel Barnier had urged the EBA to review the allowances. He tweeted: “I welcome the EBA’s findings on bankers’ allowances. Existing rules must be implemented properly: important signal to the rest of society”.
However, Omar Ali, UK head of banking and capital markets at EY, said banks “will have already restructured their remuneration packages in accordance with the rules around fixed allowances” in anticipation of the EBA decision.
The EBA said allowances could be fixed remuneration – and therefore not be included in the ratio in calculating the bonus cap – if the payment was predetermined, permanent for the time of the individual holds the rule, and non-revocable.