RegulationDec 22 2015

Controversial bonus cap set to go ahead in 2017

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Controversial bonus cap set to go ahead in 2017

The European Banking Authority has published final guidelines on remuneration policy, including the controversial bonus cap.

The guidelines ensure that institutions calculate the bonus cap correctly and consistently by setting out specific criteria for mapping all remuneration components into either fixed or variable pay.

The UK government has attempted to challenge the introduction of a bonus cap, which restricts bonuses to 100 per cent of banker’s pay or 200 per cent with shareholder approval.

HM Treasury argued that the cap would drive talent out of Europe and inflate basic pay, but it abandoned its challenge in 2014, recognising that it was unlikely to succeed.

The remuneration guidelines will come into effect on 1 January 2017.

In a statement, the EBA said that considering the huge diversity of national rules regarding the application of proportionality, it considers that legislative action should be taken in order to clarify and ensure that the remuneration requirements are applied consistently across the EU.

“In this respect, the EBA believes that a proposal for a legislative change should be considered to explicitly support specific exemptions on the application of deferral arrangements and pay out of instruments, where certain criteria are met.

“However, the opinion clarifies that the application of the so called ‘bonus cap’ should not be subject to any exemption.”

Authorities in the UK have two months to express their intention to comply with the rules.

In a statement, the Financial Conduct authority said: “As with all ESA guidelines, there are implementation processes for competent authorities to which we will respond in due course.

“The FCA, in conjunction with the PRA and HMT, will review the changes proposed by the guidelines and their application to the UK market, and will consult on any necessary changes to our domestic rules and guidance.”

Legal view

Graeme Standen at Pinsent Masons: “For investment firms, but not banks and other ‘credit institutions’, the rules that can currently be disapplied include the EU bonus cap.

“It would be wise, however, for firms to make some provision in their 2016 remuneration documents, in order to prepare the ground to be able to comply from 1 January 2017, if necessary.

“Smaller, less risky and less complex firms will continue to press for some continuing relief for them from the bonus cap, which under the final guidelines will be imposed on investment firms in this category from 1 January 2017, even if the EBA’s legislative amendments are enacted.”