EU to study bonus rule as banks take evasive action

European Union politicians will consider toughening up the region's cap on bankers' bonuses after lenders have begun softening its impact by awarding extra "allowances" to top up fixed pay.

The cap is one of the most high-profile rules from the 28-country region after public anger over high pay at banks, many of which were propped up by taxpayers in the 2007-09 financial crisis.

The rule limits a bonus to no more than fixed salary, or twice that level if approved by the bank’s shareholders, and will affect 2014 awards to be handed out early next year.

Sharon Bowles, the British Liberal Democrat chair of the European Parliament's influential Economic Affairs Committee, said that some lawmakers have complained that the rule is not strict enough.

“We are going to have a discussion on this in committee on Monday night,” Bowles told Reuters today.

Britain's HSBC has said it will give new "allowances" - expected to take the form of monthly or quarterly payments in cash or shares - to senior staff to boost their fixed pay, meaning that higher bonuses could then be awarded.

UK peers Lloyds and Barclays this week indicated that they would follow suit.

The European Banking Authority (EBA) wrote the rule, but the European Parliament has the power to veto it and force a rewrite.

“In one sense it does not help if people believe that what they have done is being circumvented,” Ms Bowles said, adding that the only option may be to reject the rule.

The EBA watchdog is already reviewing planned allowances to see if they comply with the new law and the Economic Affairs Committee will meet on the sidelines of a full parliament session in Strasbourg, France.

Britain, meanwhile, is challenging the bonus cap in the European Union’s top court, arguing that the rule will make it more difficult for lenders to cut costs when required because it encourages higher levels of fixed pay. Bonuses, meanwhile, can be cut or withdrawn easily.

The European Parliament will have to vote on any proposal by mid-April, after which it goes into recess ahead of its May elections.

Ms Bowles said that if the new rules are rejected, it could mean that nothing would be in place before bonuses are dished out early next year.

“The UK would be able to apply a lighter regime if it wishes,” she said.

While acknowledging that the banks’ extra allowances “are going to be be paid come hell or high water”, Ms Bowles added that they should be viewed as fixed overheads that need to be covered by capital reserves and that shareholders should consider whether they are too high. (Reuters)