10 times more London bankers may get hit by EU bonus cap

Proposals by the European Banking Authority, due to be unveiled in days, could apply to 10 times as many employees as first expected

PUBLISHED : Sunday, 19 May, 2013, 12:00am
UPDATED : Sunday, 19 May, 2013, 9:23am

Ten times as many London-based bankers as previously expected could be caught by Europe's cap on bonuses in a fresh sign that regulators are attempting to clamp down on City of London pay.

The European Banking Authority, which sets the rules for banks in the 27 European Union countries, is thought to have approved proposals that would require a cap on bonuses for anyone whose pay is more than €500,000 (HK$5 million).

It is the latest proposed addition to the law published in March that will require bonuses for certain bank staff in the EU to be capped at 100 per cent of their salary - or at 200 per cent if shareholders give their approval.

The proposals, expected to be published this week, would mark the first time a remuneration level had been published to define who are the "material risk takers" who will be subject to the bonus cap. In general, banks have been able to make their own calculations as to whom they view as the risk takers.

"This expansion of the definition of risk takers will see substantially more individuals working in the banking industry being hit by tougher pay rules, including being subject to bonus caps from next year," said Jon Terry, a partner at accountants PwC.

"If the proposals are implemented as proposed, this will mean anyone earning over €500,000 will be deemed a risk taker irrespective of their role or impact on the risk of the firm. This will significantly increase the number of employees subject to the bonus capping, to perhaps as much as 10 times for some investment banks … in London."

Barclays, which has provided a more detailed breakdown than any other bank of staff pay in 2012, paid 1,338 people more than £500,000 (HK$5.91 million) - although this included bonuses. It described 393 as "code staff", meaning those regarded as taking or monitoring risk.

The finance minister, George Osborne, had attempted to head off the bonus cap when it was discussed in March for fear that it would damage the City. Andrew Bailey, the head of the Prudential Regulation Authority, the City's new banking regulator, has warned that a bonus cap could push up banking salaries by £500 million a year.

Peter Snowdon, a financial services lawyer at Norton Rose, said clients had already been calling him up to ask about the implications of the €500,000 threshold.

"It is obviously something that has significant implications for European business and will certainly lead some people to wonder if they can be bothered," Snowdon said.

The European Union is looking at ways to make banks pay for the billions in help they have received from governments and central banks to stay afloat in the financial crisis, including a possible tax on financial transactions being considered by 11 member states.

In March the EU approved a new law barring bankers from awarding themselves payouts worth more than their salary, by far the world's most stringent curb on financial sector pay.

Christopher Mordue, a specialist employment lawyer at Pinsent Mason, said the "massive" extension to the bonus net will raise concerns about damage to the competitiveness of London as a financial centre.

"So this proposal will also intensify the search for creative solutions which allow existing levels of overall remuneration to be retained," he said.

Additional reporting by Reuters