Brussels regulators are heading for a clash with the Bank of England over the way it is allowing City banks to get around its new bonus cap rules. The latest flashpoint emerged as Barclays was finalising controversial bonus hikes for its investment bankers despite having to tap shareholders for £6bn of extra funds.
The European Commission has ruled that banks cannot pay more than two times a banker's salary in bonuses. Officials hope this will serve to reduce the temptation for bankers to take risks that are dangerous to their banks and the financial system.
But Goldman Sachs in London, Barclays and HSBC are all proposing to get around the rules by offering a "role-based allowance".
Goldman is said to have had its scheme approved by regulators, as the allowance will be varied every month depending on the state of the economy. Barclays' proposed monthly allowance will be varied annually. Full details will be published before a shareholder vote on the scheme at its spring annual general meeting.
However, the commission is clearly concerned that this is merely a bonus by another name, and has demanded an explanation from the banks' Prudential Regulatory Authority over how it can approve them. An official told Reuters the commission had demanded the European Banking Authority watchdog "take a strict approach" when demanding answers from the PRA.
Given the British Government's opposition to the caps, analysts said the commission was suspicious that UK regulators were taking a relaxed approach to banks' proposals.
A spokeswoman for the EU financial services chief, Michel Barnier, said: "One would expect banks to interpret this in a common sense and straightforward way without trying to circumvent it by including in fixed remuneration elements which actually vary in level."
Barclays is to offer bonus rises for its staff above the £1.854bn pot paid out last year. Although sources denied reports it would be as much as £2.4bn, it is expected that deals would be more generous.
News of the bonus pots came just days after its chief executive Antony Jenkins turned down a bonus of up to £2.75m for the year.
Mr Jenkins said he had taken the decision due to the historic "litigation and conduct issues" at the bank. However, Barclays sources said the bank had to continue paying top dollar to its investment bankers or face an exodus of its best "rainmaking" bankers.
With investment banks and hedge funds expected to begin hiring more staff during this year, banks say they are feeling renewed pressure to turn up the bonus taps.