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Friday, October 17, 2014

UK takes another blow over bankers' bonus cap

EBA HQ in London
The European Banking Authority (EBA) on Wednesday released the results of its investigation into whether banks across Europe have been using ‘allowances’ to skirt the EU’s bankers’ bonus cap. This is obviously a hugely contentious issue in the UK and the fact that UK banks have been taking this approach has been well publicised and oft criticised by EU politicians. But it’s interesting to note that the EBA found 39 banks across six EU states had been using such allowances, so clearly it is an issue which extends beyond the UK’s big banks.

Nevertheless, the opinion does not bode well for the UK with the EBA concluding:
“The EBA found that in most cases institutions had topped up the fixed remuneration of their staff and had introduced discretionary ‘role based' allowances which have an impact on the limit of the ratio between variable and fixed remuneration required by the EU Capital Requirements Directive (CRD IV).”

“The report showed that most of the allowances, which were the subject of the EBA investigation, did not fulfil the conditions for being classified as fixed remuneration, namely with respect to their discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification.”
The report is much as expected, with the EBA making the case that the allowances are not permanent pay for a number of reasons: they are revocable with little notice, specific to the staff member not the role, often have forfeit clauses therefore not permanent and are often linked to proxies for the firms performance (such as the economic environment).

The last point in particular clearly chimes with concerns from banks that they will have less control over their costs at times of economic hardship. This is exacerbated by the point (number 37 in the report) below which is frankly just a bit strange:
"Some role-based allowances might only have been introduced to comply with the bonus cap introduced by the CRD IV while retaining some cost flexibility. Cost flexibility is of importance where the performance of the institution or a business unit is no longer considered adequate."
Surely, cost flexibility is always relevant for a business, particularly one in a very competitive environment, and not just when it is failing? We’re not quite sure what the EBA is getting at there.

What happens now?
  • The opinion isn’t binding, although the EBA has said it expects national regulators to make sure that all banks are in compliance by the end of the year, however, it has no legal way to enforce this (yet).
  • The EBA is currently reviewing its guidelines on the issue and will hold a public consultation before the end of the year with the new official rules being published in the first half of 2015 (at this point they will be legally binding).
  • In particular, if banks want to continue using allowances they will have to be “predetermined, transparent to staff and permanent”.
  • Ultimately, this throws a bit more uncertainty in the mix with banks uncertain over exactly how and when to adjust their allowances.
What does this mean for the UK?
  • Clearly, this is a bit of a blow for the UK. That said, the issue has already to an extent moved out of the EBA’s hands. The UK is challenging the original proposal at the European Court of Justice. Even if this proposal fails it could challenge the updated guidelines/rules which are used to implement the cap. Banks themselves could of course choose to launch legal challenges although this looks unlikely at this stage.
  • Banks will ultimately find a way to pay their staff the market rate. This will likely end up being in the form of higher base salaries, something which will make banks less flexible and push up their average costs. This could potentially harm competitiveness and possibly force banks to pass on such costs to consumers.
  • The biggest concern is a broader one of precedent and where laws are really made. The bonus cap was a specific law tagged onto a much larger piece of legislation to which it is largely unrelated. This significantly aided its passage through and watered down scrutiny. Then given the technical nature of the rules a lot of the holes were filled in by the Commission and the EBA in setting the exact parameters for implementation – providing a lot of power to the two institutions. The temptation to take such an approach with complex financial regulation is obvious and circumvents the little accountability and control which member states have.
This debate surely has some way to run yet but this looks to be one battle which so far the UK is losing.

2 comments:

Average Englishman said...

This is excellent. The more that the EUSSR puts the screws on the money men (and women) in The City of London the better. This will help still further to dampen the City's enthusiasm for Brussels and in turn this will put pressure on Dave and his minions to get the UK out of the EUSSR. Money talks and moves like this will help to sway the conversation towards the UK breaking free. It can't come soon enough.

Jesper said...

The bonus cap legislation is a bad idea and meaningless, however, the investigation we now see should be an interesting test-case for equality in applying laws.

If banks, and by implication its CEO and other senior executives, are found to be guilty then there should be some consequences. Or rather, if the laws are to be applied also against the powerful, then we'd see some connected people sitting in court. Or is this an example of the mythical perpetrator-less crime?

My guess is that no individual will be held to account. Probably because this will continue:
"it has no legal way to enforce this" (bonus cap).

The idea of the bonus-cap will continue as long as there is money to be had in doing research about it, debate about it and generally allocate costs against the money funded towards this.
There'll be plenty of extremely well-paid busy work for some coming out of this.....