Last updated: October 7, 2010 7:16 pm

EU set to clamp down on bankers’ pay

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European regulators plan tougher-than-expected restrictions on bankers’ pay, in spite of concerns raised by French, UK and Spanish officials that the rules could make the European Union uncompetitive, people familiar with the talks said.

The Committee of European Banking Supervisors – made up of representatives of all 27 EU countries – has been meeting in London to implement the tough pay rules agreed by the EU over the summer.

Discussions concluded late on Thursday and the group is due to issue draft regulations within days. The document will be the basis of a one-month consultation with the industry.

Some regulators, who believe the rules are impractical, plan to use the period to push for further changes.

In a blow to banks with global operations, the rules would apply to the worldwide operations of EU-based banks and the European subsidiaries of any non-EU banks. Industry groups have warned this would make EU banks uncompetitive in rival markets in Asia and the US.

In response to the EU legislation linking the size of bonuses to base pay, the draft regulations call on banks to set a maximum ratio between salary and bonuses.

The acceptable ratio is likely to depend on each national regulator’s view on whether a bank under their supervision is effective in linking pay to performance and risk.

Such a ratio would force a wholesale restructuring of pay policies at many investment banks and almost certainly increase fixed costs because salaries would be inflated.

CEBS members are also bitterly divided over how strictly to interpret a planned cap on upfront cash payments. The EU directive already calls for up to 60 per cent of bonuses to be deferred for three years and CEBS draft regulations specify that any immediate cash payment must be capped at 20 per cent of the total bonus.

But the UK Financial Services Authority and several other regulators have argued for simply limiting the cash portion to 50 per cent of the total bonus. That battle is expected to continue through the consultation.

Although the EU directive states that the pay rules apply to senior management and “risk takers”, regulators may also require each country to set a floor where the pay restrictions would kick in. The FSA code currently applies to people making more than £500,000.

The current draft contains good news for asset managers because it allows national regulators to adapt the rules to be “proportional” for non-banks. The FSA has said it will modify the rules for hedge funds and focus on ensuring that managers’ returns and time horizons are aligned with investors’.

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