16th May 2021

EU watchdog to close loophole on bank bonuses

  • Seventy five percent of the EU's banking millionaires are based in the City of London (Photo: Neil Howard)

The EU's banking watchdog is poised to close a loophole allowing banks to use special allowances in a bid to get round the bloc's rules on bonus payments.

Under the rules passed by MEPs and ministers in 2013, banks are allowed to pay staff bonuses on a ratio of up to 1:1 with wages, with an exemption to pay bonuses on a 2:1 basis with the approval of at least 66 percent of shareholders.

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However, the European Banking Authority (EBA), which implements EU rules on lenders, was ordered to conduct an investigation by EU financial services commissioner Michel Barnier in February following reports that a number of institutions were using allowances to inflate wages.

In a report published Wednesday (15 October) the EBA stated that 39 banks were using "role-based" or "market value" allowances to top up the salaries of their staff.

"Most of the allowances … did not fulfil the conditions for being classified as fixed remuneration," it said.

Banks are allowed to pay allowances to their staff, but only if they fulfil a raft of criteria including being non-discretionary, permanent and predetermined.

"Institutions which use such discretionary role-based allowances will be expected to treat them as variable remuneration and change their remuneration policies so that they comply with the requirements", the EBA report noted.

Although neither the EBA's report or accompanying opinion are legally binding, the findings are likely to be reflected when the EBA revises its guidelines to banks early next year. For its part, the European Commission will conduct a review of the law in 2016.

"I welcome the EBA's findings on bankers' allowances. Existing rules must be implemented properly: important signal to the rest of society", tweeted Barnier.

EU lawmakers said the cap, which applies to financiers earning more than €500,000 per year, was aimed at curbing excessive risk-taking and speculation among executives.

But the regime is also subject to a legal challenge by the UK government last year September.

The UK has, in the City of London, the largest financial services sector in Europe and is where 75 percent of the EU's 3,500 financiers earning more than €1 million per year are based.

It has argued that the bonus cap breaks the EU treaties by interfering with decisions made by private companies and puts European banks at a competitive disadvantage.

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