Britain and Brussels fight over City bonuses

British banks’ attempts to wriggle free of new rules putting a cap on bonuses have come under fire from the European regulator in a move that throws a fresh challenge to the Bank of England and the British Government.

With backing of the Chancellor, George Osborne, City investment banks were given the go-ahead by the Bank’s Prudential Regulation Authority last year to avoid Europe’s new rules limiting bankers’ bonuses to one or two-times their salaries. They did this by introducing so-called “allowances”. These were “role-based” and could be increased or lowered depending on the general market conditions, rather than on the performance of the individual banker. But critics said they were merely a fig leaf designed to be manipulated in order to pay for performance.

Yesterday, the European Banking Authority – the enforcer for the European Commission – said the allowances were in effect bonuses. “Role-based allowances which are discretionary, not predetermined, not transparent to staff or not permanent should not be considered as fixed but should be classified as variable remuneration,” it said.

The EBA’s ruling is not legally binding but made clear again how diametrically opposed European regulators are to the UK. All 28 European financial watchdogs, and the EBA, are currently working on permanent guidelines, in talks which, apart from a few countries such as Holland and Sweden, will pit Britain against all of its neighbours.

The guidelines were to have been drafted and put out for public consultation this month, but delays mean they may now not be ready much before Christmas. Even if those guidelines do align against the British position allowing role-based allowances, the UK can still refuse to comply as long as it explains why.

British bankers and regulators argue that the bonus cap will simply drive up the fixed pay element of remuneration. That in turn will make it harder for banks to cut the payroll bill when profits fall.

Andrew Tyrie MP, the chairman of the Treasury Select Committee, said: “The EU bonus cap is a fundamentally flawed approach. It will encourage banks to increase fixed pay rather than embed incentive structures that improve standards.”

Michel Barnier, the departing European Union commissioner for financial affairs, said: “I now expect the supervisors and banks concerned to take full account of the EBA opinion, in accordance with the EBA regulation, by the deadline set.”