EU chides banks on bonuses

A survey released by the European Banking Authority (EBA) on Wednesday said discretionary remuneration practices adopted by some banks in the 28-nation bloc violated an EU cap on bonuses.

According to the EBA investigation, 39 financial institutions were using "role-based" or "market value" allowances, which were unlawfully classified as fixed remuneration components.

After the 2008 financial crisis, the EU imposed a cap on bankers' bonuses in order to curb their excessive risk-taking that is said to have led to many banks having to be bailed out by taxpayers. Under new EU rules, bonuses must not be higher than basic pay, or twice that amount if shareholders approve. Moreover, remuneration must either be classified as variable, meaning part of a bonus, or fixed.

EBA said that the reprimanded banks had resorted to new types of allowances which "do not fulfill the conditions" for fixed remuneration because institutions can "adjust or withdraw them unilaterally, without any justification."

However, the EBA approved of routine allowances for childcare, regular pension contributions, travel and health insurance, as well as "market value" payments to employees working outside their home country.

EU sets ultimatum

EU Financial Services Commissioner Michel Barnier said the EBA report had sent "a very bad signal to society," showing that banks had not learned from the crisis or adapted their cultures.

"Compliance with both the letter and the spirit of the law is a prerequisite to restore trust and stability in our banking system," he said upon receiving the EBA report, which he commissioned.

He also noted that the banks in question must rewrite their remuneration policies by Dec. 31 for allowances to be properly classified in time for bonus payouts due in early 2015. Otherwise, the Commission would decide if enforcement action was needed.

Banks scramble and stonewall

Wednesday's ruling is a blow mainly to banks in London, after the Bank of England had endorsed the allowances, calling it the "least worst" alternative to the bonus cap. Moreover, they may be reluctant to follow the EU rules, pending a British government legal challenge to the cap in the EU's top court.

According to industry sources, an estimated 10,000 London bankers receive role-based allowances, including those of banking heavyweights Barclays, HSBC, Deutsche Bank and JPMorgan.

The banks have claimed they need discretionary remuneration to keep top staff and improve general performance.

From January to April 2014, Britain's financial sector paid out bonuses to the tune of 14.4 billion pounds (17.9 billion euros, $22.9 billion), up 3 percent from the previous year. The bonus payments, however, were down from a record 18 billion pounds marked in 2007 and 2008.

uhe/cjc (Reuters, eba.europa.eu)