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Banks continue fight against bonus rules

The European Banking Federation (EBF) has written to the European Commission asking for more flexibility in the proposed rules on bonuses for financial services companies, according to press reports.26 Aug 2015

European Banking Authority (EBA) guidelines on how firms' remuneration policies should comply with the requirements of the EU's Capital Requirements Directive (CRD IV) are due to be revised with effect from next year, and a draft was published for consultation in March 2015.

The draft guidelines require banks and investment firms to change the way they classify 'role-based allowances' (RBAs) paid to senior staff for the purposes of the CRD IV bonus cap.

In a letter seen by the Financial Times, EBF president Frédéric Oudéa told Vera Jourova, the Commission member responsible for executive pay regulation, that exemptions were needed to avoid "disproportionately high implementation costs and administrative burdens without any commensurate benefits".

"A strict interpretation of the rules would lead to absurd results, with a heavy administrative burden," Wim Mijs, EBF chief executive, told the Financial Times. "The current legal text has enough scope to apply some proportionality," he said.

The UK regulator, the Prudential Regulation Authority (PRA), originally objected to the changes regarding RBAs, with its CEO saying "the bonus cap is the wrong policy … and the best thing I can say about allowances is that they are a response to a bad policy". The PRA, however, has since accepted that the EBA's approach to RBAs will take effect from next year.

When conceding that the approach to RBAs would change, the PRA still held out some hope that the EBA would accept some changes to the approach taken in the draft guidelines to proportionality, said financial services remuneration expert Lynette Jacobs of Pinsent Masons, the law firm behind Out-Law.com

"The EBA's position is that, although CRD IV applies its remuneration provisions 'proportionately' to each firm's size, complexity, activities and risks, legally all of the rules must be applied by all firms regardless of these factors," said Jacobs.

"This is a major change from the approach taken across the EU to the implementation of the remuneration provisions of the last incarnation of the EU Capital Requirements Directive (CRD III), which as yet still applies to a large extent under CRD IV. Under this approach, various detailed rules for the remuneration of senior staff, including the bonus cap, do not apply to many smaller, less complex and less risky firms. Many banks and some EU member states have argued that the new interpretation will push up fixed pay and compliance costs and will have a disproportionate impact on smaller banks, brokerages and investment firms," she said.

The finalised EBA guidelines have not yet been published, but should be released in the next few months, Jacobs said.

Financial services remuneration expert Matthew Findley, also of Pinsent Masons, said in May that many firms that were not considered to be 'systemically important' currently had some flexibility around the rules on pay set out in the latest version of the CRD IV.

"If the EBA guidelines come into effect without greater flexibility, which may require input by the EU legislature, then they will have a substantial impact on many more firms, including those that are not as systemically important and which are currently allowed to disapply several CRD IV remuneration requirements," he said. "These firms will need to revise their remuneration structures by the beginning of 2016 if the guidelines are adopted in their current form."

In June, the City of London Law Society published a response to the draft guidelines saying that the EBA's approach to proportionality in the draft guidelines did not follow the wording of CRD IV, and that it was "surprising" that the EBA had not given a better explanation and justification of its decision to overturn existing guidance on proportionality.