Banks face tougher pay rules as EU moves to enforce bonus cap

[LONDON] Europe's top banking regulator proposed to make it harder for lenders to sidestep limits on bonuses by closing loopholes used to give discretionary payments on top of salary.

The European Banking Authority said in a consultation paper published on Wednesday that so-called role-based allowances would need to fulfill criteria such as being "predetermined," "transparent to staff" and not dependent on performance to be classified as salary rather than bonus.

European Union lawmakers capped bonuses in 2013, adopting the world's toughest bonus rules in a bid to tackle what they called a gambling culture blamed for contributing to the 2008 financial crisis. Royal Bank of Scotland Group Plc and HSBC Holdings Plc have been among European banks that responded by giving employees allowances depending on seniority, known as role-based pay, to get around the restriction.

"Remuneration is either fixed or variable; there is no third category of remuneration," the London-based 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."

The consultation period for the revised guidelines, which implement a legal opinion published by the EBA last year, ends on June 4. National regulators must comply with the rules or publicly explain reasons for ignoring them.

The EBA said that it believes small firms should be granted "specific exemptions" from the bonus rules and 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."

"Most of the allowances" the EBA investigated didn't qualify as fixed pay because of their "discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification," the regulator said in an opinion last year.

Britain was home to 2,188 investment bankers earning more than 1 million euros (S$1.53 million) in 2012, the most in the EU, while Spain counted 37, according to EBA data. France and Germany had 117 and 100, respectively.

Top UK investment bankers were paid an average of 1.95 million euros in 2012, the most in Europe, and had an average bonus-to-salary ratio of 370 per cent, according to the survey. Salaries for senior bankers rose an average of 26 per cent in 2012 as banks prepared for bonus caps, the EBA said in a report, surveying 137 banks across the EU.

BLOOMBERG