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PRA and FCA will not comply with EU rules on bonus caps

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have notified the European Banking Authority (EBA) that the regulators will not comply with rules that would force the bonus cap paid by large banks onto smaller financial institutions. 02 Mar 2016

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 EBA said in December that smaller banks and asset management firms should be subject to the same senior staff bonus rules as large firms from 1 January 2017, although it also said that also said that national regulators would be allowed to exempt smaller institutions from some aspects of the rules if the European Commission and EU legislature accept proposed amendments.

The PRA and FCA said in a joint statement that they will "comply with all aspects of the EBA guidelines on sound remuneration policies, except for the provision that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval (the bonus cap), must be applied to all firms subject to the Capital Requirements Directive (CRD)".

Neither body agrees with the interpretation of the CRD taken in the guidelines, they said. Instead, the PRA and FCA take a "proportionate, risk-based approach" based on CRD wording which says that institutions must comply  in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities", they said.

"All large and systemically important CRD-regulated firms must continue to apply the bonus cap. In parallel, the PRA and FCA will retain the current approach of requiring smaller firms to determine an appropriate ratio between fixed and variable remuneration for their business whilst not applying the bonus cap," they said.

Financial services employment expert Steven Cochrane of Pinsent Masons, the law firm behind said: "The PRA has consistently opposed the bonus cap, which it considers to be a 'bad policy'. It was not clear, however, whether the PRA and FCA would sustain that public opposition once the EBA guidelines had been finalised. They have now made it very clear that they will, and have set out their reasons cogently."

"Many firms will be pleased about this. This is of particular significance to those smaller proportionality level 3 firms which are currently afforded more flexibility and can effectively dis-apply the cap. These now have a reasonable hope of not having to apply the bonus cap for the first time from 2017," he said.

"Larger firms already subject to the cap will also be encouraged that the UK regulators’ stance could reinforce a broader debate about whether the bonus cap should be retained at all, in a year in which the CRD IV remuneration rules are under formal review. Many of these firms have been grappling with their own compliance in the wake of the EBA’s restrictive of interpretation of when a 'role based allowance' will genuinely represent fixed pay and these firms will be watching developments very closely," Cochrane said.

"CRD IV strongly encourages the harmonisation of national banking regulatory stances across the European Economic Area. Indeed, that is the purpose of the EBA guidelines made under CRD IV that the PRA and FCA have now partly disavowed. The rules also expressly allow for a national regulator to state that it will not comply with aspects of the guidelines, after which it is not clear what scope the European Commission has to attempt to enforce compliance. For this reason, we knew that there could be exciting news during the current period, in which regulators must disclose to what extent they will comply," he said.

Reports last week suggested that the rules may be redrafted or given more flexibility by the EU. Věra Jourová, the EU commissioner with responsibility for rules on pay, realised that the rules are too harsh after a "bureaucratic bungle", sources told the Financial Times.