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EBA stance on role-based allowances will have significant impact on smaller firms, says expert

UK banks cannot pay staff 'role-based allowances' to circumvent European Union bonus caps, the European Banking Authority (EBA) has said. This will have a significant impact on smaller and less risky firms, an expert has said. 13 Nov 2015

Role-based allowances "that are not predetermined, are not transparent to staff, are not permanent, that provide incentives to take risks or, without prejudice to national law, are revocable, should be classified as variable remuneration in line with the letter and intent of [the bonus cap]," the EBA said.

Institutions’ remuneration policies must make a clear distinction between ‘fixed’ and ‘variable’ remuneration, the EBA said: "A clear distinction of the remuneration components is paramount when calculating the ratio between the variable component and the fixed component of remuneration."

The EBA brought in rules in 2013 capping bankers' bonuses at 100% of their annual salary, or 200% with shareholders' approval. The report said a "number" of institutions across the EU had changed their remuneration policies by introducing role-based allowances and treating them as fixed remuneration. 

Remuneration expert Steven Cochrane of Pinsent Masons, the law firm behind Out-Law.com, said "This confirms public comments made earlier this year by Andrew Bailey, chief executive of the Prudential Regulation Authority, in relation to allowances and the UK’s agreement with the EBA regarding their usage."

Bailey said in May that EBA guidelines would take effect in the UK from next year.

However, Bailey also said that the UK had not dropped its opposition to the EU-wide restrictions, on the grounds that they push up fixed pay. He said that the UK hoped to be able to continue to apply the remuneration rules "proportionately", despite the EBA's position that all the rules must be applied by all firms regardless of size.

Cochrane said: "The final EBA remuneration guidelines that will address role-based allowances more authoritatively than the EBA has done so far will be much anticipated by firms subject to CRD IV, especially by smaller firms and as regards how these guidelines address the implementation of the proportionality of application required by CRD IV."

"The EBA states that these guidelines are 'expected to be finalised by the end of 2015'. If the guidelines maintain the rigorous line adopted in the draft, they will have a significant impact on smaller and 'less risky' firms that could previously disapply some specific CRD IV requirements, including, but not only, the bonus cap. Likewise, on the narrower role-based allowances classification issue, the final guidelines will still be important, as the EBA states they 'will contain further criteria to identify both fixed and variable components of remuneration'," he said.

The EBA also said that it had analysed the remuneration policies of 35 institutions in 2014 and found that eight of these broke bonus cap rules last year.

"Given the timing of the publication of the EBA opinion in October 2014, it was not always possible for the institutions to retroactively change their remuneration policies and practices for the performance year 2014. The [competent authorities] have taken measures to ensure that these practices are changed in 2015," the EBA said.