Banks’ use of so-called allowances to soften a European Union cap on bonuses could face a “coordinated policy response”, the EU’s financial services chief Michel Barnier has warned, prompting bankers to argue politicians should steer clear of pay.
The EU imposed controls on banker bonuses, blamed for encouraging risk-taking by staff whose year-end haul was linked to their revenue-generating record, after taxpayers were forced to shore up lenders whose shaky finances were suddenly exposed in the financial crisis of 2007-2009.
The controls limit payouts to the equivalent of an employee’s fixed salary, or twice that amount, with shareholder approval.
On Sunday (7 September) Barnier asked the EU’s banking watchdog, the European Banking Authority (EBA), to wrap up by the end of September its probe into whether quarterly and monthly role-based allowances being paid by banks such as HSBC, Barclays, Citi should be allowed under the bonus cap rule.
But banks insist allowances are part of fixed pay, and reject accusations from some European Union lawmakers, and pundits, that they are simply stealth bonus payments.
“Ultimately we think that decisions about pay is a matter for shareholders and not politicians,” the British Bankers’ Association said on Monday (8 September).
The EBA had said it would complete its probe into allowances and report back by the end of the year, with possible new guidance for banks before the cap takes effect on awards handed out early in 2015 for performance covering 2014.
But Barnier published a letter in which he asked the EBA to speed up its timetable for the probe.
“It is important to show a collective, proactive stance on this important matter and address the claims made that the spirit – if not the letter – of union law is being disregarded,” Barnier said in his letter to EBA Chairman Andrea Enria and made available to the media.
“I would therefore be very grateful if you could share with us the results of your work on this issue as soon as possible and at the latest by the end of September, in order to ensure that we can address any concerns in a timely manner through a coordinated policy response,” Barnier said.
Barnier, who did not say what this coordinated response might consist of, has the power to propose amendments to EU law if he thinks it is being circumvented by bankers, a step some regulators say privately would be needed to make any changes.
A spokeswoman for the EBA said, “When we have deadlines we comply with the deadlines. There will be interaction with the commission on these findings.
“Once we gather the findings and see where the problem is, then that’s the starting point for defining clear criteria for allocating the allowances to fixed or variable pay.”
Britain’s top banking supervisor, Bank of England Deputy Governor Andrew Bailey, said in April that allowances were being used to soften the blow of the bonus cap but were the “least worst alternative”.
ECJ hearing today
Barnier’s intervention came ahead of his scheduled departure from his post at the end of October, when a new commission takes over. It also came on the eve of a hearing in the bloc’s top court on a challenge to the cap mounted by Britain.
“Britain has taken a global lead in efforts to tackle unacceptable remuneration practices in the banking sector, which is why we oppose this EU-wide bonus cap, which was rushed through without a proper impact assessment and which could undermine financial stability by leading to higher fixed costs at banks,” the finance ministry said in a statement.
Home to most of the bankers hit by the cap, Britian will argue before the European Court of Justice in Luxembourg that the rule hands too much power to the EBA.
The cap breaches the EU’s treaty by impinging on pay and fails to protect privacy, Britain will argue. The court is not expected to rule on Britain’s challenge until the end of the year at the earliest.
Sven Giegold, a Green Party member of the European Parliament’s economic affairs committee which pushed through the cap, said going to court was a sign of weakness in UK arguments.
“Although we have no general competence to regulate pay, we do have the power to use regulation to protect financial stability and that is the purpose of the bonus cap,” Giegold said.
Co-president of the Greens/EFA group in the European Parliament Philippe Lamberts said, "We are hopeful that the EU's justice system confirms the legality of this major step for economic justice. The decision to curb the excessive bonuses paid to bankers has meant that the EU finally, if belatedly, responded to public interest and demand regarding the sometimes obscene levels of bankers' remuneration.
"It is also a crucial measure for removing the incentives for reckless risk-taking in the financial sector. Beyond this legal action by the UK, which will hopefully not be successful, the European Commission needs to clamp down on those jurisdictions not correctly or completely applying the bonus-capping measures."
Britain has launched a legal challenge to the European Union's cap on bankers' bonuses which London fears will hurt its financial industry.
Finance minister George Osborne has long argued that Brussels has gone too far with reforms aimed at preventing a repeat of the financial crisis. But EU financial services chief Michel Barnier said the bonus cap was legal.
The EU law will limit a bonus to no more than a banker's fixed salary, or twice that level with shareholder approval.