European Banking Authority Proposes Stiffer Bonus Rules

European Banking Authority Proposes Stiffer Bonus Rules

The European Banking Authority proposed to make it harder for lenders to sidestep limits on bonuses by plugging loopholes used to give discretionary payments on top of salary.

The eurozone’s watchdog published Wednesday the revised guidelines and put out to consultations for three months.

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Bonus rules: There is no third category of remuneration

According to the EBA’s revised guidelines, remuneration is either fixed or variable; there is no third category of remuneration. The EBA said: “The correct mapping into these two categories is crucial for the calculation of the ratio between the variable and the fixed component and to safeguard that the limitation of this ratio is complied with”.

In 2013, EU lawmakers capped bonuses, adopting the world’s toughest bonus rules in an attempt to tackle what they called a gambling culture blamed for contributing to the 2008 financial crisis. Some of the European banks, including Royal Bank of Scotland Group, responded by giving employees allowances depending on seniority, known as role-based pay, to get around the restriction.

Most of the bankers hit by the cap are based in London and the EBA said in October that “allowances” paid by 39 banks in six countries to boost fixed pay, and hence soften the bonus cap, breach EU rules.

Watchdog could “name and shame” national regulator

EBA’s Wednesday guidelines require Britain and other EU states to apply the rules bonuses paid from early 2015, or explain publicly why not. If EBA felt an explanation regarding complying was without merit, it could “name and shame” the national regulator. The EU could even take the member state to the top European court, which has powers to levy fines.

However, the EBA wants small banks be granted “specific exemptions” from the bonus rules and said that it would ask the European Commission, the EU’s executive arm, for “legislative amendments that would allow for a broader application of the proportionality principle”.

Moreover, thousands of asset managers, insurance executives and other professionals working for bank subsidiaries could also soon have their remuneration curbed by the EU’s bank bonus cap. The EBA said it wants the bonus cap to be applied in all bank-owned subsidiaries, even ones not usually subject to banking regulations. The national regulators across the EU’s 28 countries have to ensure that bank subsidiaries comply with the rules, which restrict bonuses for key staff to twice their fixed pay.

Interestingly, as reported by ValueWalk last November, a UK challenge to a cap imposed on bankers’ bonuses by the EU had been rejected by advocate general of the European Court of Justice.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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