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EU to reconsider banking bonus rules

New banking bonus rules being developed by the EU may be redrafted or given more flexibility, the Financial Times has reported. 26 Feb 2016

Věra Jourová, the EU commissioner with responsibility for rules on pay, has realised that the rules are too harsh after a "bureaucratic bungle", sources have told the Financial Times.

Officials noticed too late that exemptions built into previous rounds of legislation "disappeared" in the banking law that came into effect in 2014. The Commission is now looking into how this can be resolved, including possible "legal fixes" in revised bank capital rules that are due to be proposed this year, the Financial Times said. 

Financial Times' sources said that Jourová has discussed the problem with financial services commissioner Jonathan Hill, who agreed that changes are needed.

The bonus cap rules set out in the EU's Capital Requirements Directive (CRD IV) have been in force since the start of 2015 and restrict senior staff bonuses to 100% of their fixed remuneration in any given year, or 200% with the agreement of shareholders.

The European Banking Authority (EBA) said in December that smaller banks and asset management firms should be subject to the same senior staff bonus rules as large firms, but also said that national regulators would be allowed to exempt smaller institutions from some aspects of the remuneration rules set out in CRD IV, if the European Commission and EU legislature accept proposed amendments set out in the EBA's final opinion on proportionality (29-page / 383KB PDF).

Remuneration expert Graeme Standen of Pinsent Masons, the law firm behind said: "This is welcome confirmation that the Commission agrees with the EBA that flexibility must be restored to the CRD IV remuneration rules for smaller and less risky banks and firms, and if necessary legislative amendments will be proposed in this year's review of CRD IV."

"The report also suggests that at the same time the legislature may seek greater harmonisation and reduced national discretion across the European economic area, which could raise some concerns for UK banks," Standen said.

The Bank of England said this month that proposed caps on bankers' bonuses do not address risk-taking or "poor conduct" in the industry.

In response to a broad European Consultation on the EU's regulatory framework for financial services, which also suggests other regulatory improvements, the Bank of England repeated concerns it has expressed previously. It has said the bonus cap is counter-productive, because it drives up fixed pay, reduces firms’ cyclical cost flexibility and perversely makes material risk takers less personally accountable for risk management failures, by reducing the proportion of their pay that can be lost as a result of any failure.