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BFCSA: Banks to defy Snoozing European Regulators re $4 million annual bonuses to CEO's

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Banks set to defy European regulator on bonus rules

European Banking Authority's request for banks to change policies related to 'allowances' expected to go unheeded this year

By James Titcomb

7:29PM BST 18 Oct 2014

British banks will defy the European regulator in continuing to use “role-based allowances” to navigate the controversial bonus cap, in a move likely to increase tensions between Brussels and the City.

The European Banking Authority (EBA) last week told financial institutions to cease paying staff via certain types of allowances, declaring that they constituted a breach of EU rules that limit bonuses to 200pc of salaries.

However, it is understood that Britain’s biggest banks will continue to use them in next year’s pay round, and are expected to receive the tacit support of the Bank of England in doing so, according to senior individuals in the sector.

Last Wednesday, the EBA said that allowances – which are linked to a banker’s role rather than the bank’s financial performance, but can be taken away – constitute variable pay and so should be included in the cap.  It said the majority of the 39 banks that had resorted to allowances had breached the bonus cap, and that domestic regulators should take this into account to make sure banks change their policies by the end of the year.

Individuals at the EBA added that although this was not mandatory, bodies including the UK regulator – the Bank of England’s Prudential Regulation Authority (PRA) – are expected to take action.  Adam Farkas, executive director of the EBA, said last week: “This opinion in itself is not binding, but of course the expectation is the national supervisors will take it on board and look at existing practices.”

The PRA is seen as unlikely to do so, however. Andrew Bailey, its chief executive, launched an outspoken attack on the bonus cap last week, and said allowances were “a response to a bad policy”.  The EBA diktat is seen as far from the final say on the matter, given that it is to be updated in guidelines on pay in the first half of next year. According to financial lawyers, it would then have to be approved by the European Commission to force a change.

Michel Barnier, the current commissioner for financial services and a prominent critic of allowances, will be replaced by Lord Hill, the Tory peer, at the start of November, although responsibility for bankers’ pay has been handed to the new justice commissioner, the Czech Republic’s Vera Jourova.

The delay until the EBA makes its final guidelines, as well as the handover at the European Commission, means bankers’ pay for 2014, delivered next year, is unlikely to be affected.  “Legally, it’s non binding, it’s not enforceable but about putting pressure on the PRA and the banks,” said Jean-Francois Gerard, a lawyer at Freshfields.

“[The banks] could ignore it, as today there is no risk in doing so. Next year there will be an entirely new political dynamic and who knows what will happen.”  However, bankers have privately admitted there is a direction of travel with regards to allowances, and that they are likely to have to change pay policies at some point.  The bonus cap has proved to be deeply unpopular in the City, where the vast majority of Europe’s highly-paid bankers work.

Financial groups, the Government and regulators have complained that it simply forces them to increase salaries in order to compete with rivals in the US and Asia, making banks less flexible in responding to market conditions and therefore less stable.

All of the UK’s major banks have turned allowances this year in response to the cap, which the Government is fighting in the European Court of Justice.

Ross McEwan, the chief executive of Royal Bank of Scotland, said last week that “you do not want to be moving your pay structures around [each year]” and that “you need to be able to pay people to get us into the position we want to be”.





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