Newspaper article International New York Times

Banking Authority Clarifies Rules on Pay ; European Guidelines Tell Industry How to Handle Bonuses and Allowances

Newspaper article International New York Times

Banking Authority Clarifies Rules on Pay ; European Guidelines Tell Industry How to Handle Bonuses and Allowances

Article excerpt

The regulator made clear that banks can't get around the bonus cap in a 2013 law with so-called allowances.

A European banking regulator issued formal guidelines on Wednesday instructing banks on how they can pay certain employees and who is affected by a much-debated cap on bonuses.

The 119-page document from the regulator, the European Banking Authority, indicated that the bonus cap applies to all bank-owned subsidiaries, including asset managers and insurance groups, if their employees take risks that could affect the overall group's stability.

Many banks appear not to have been applying the bonus cap to these groups, and will now need to do so.

The guidelines from the authority, which writes guidelines to interpret European laws, will apply the rules to "institutions on a solo and consolidated basis, including all subsidiaries which are not subject to the CRD IV framework," a news release accompanying the guidelines said. CRD IV stands for Capital Requirement Directive IV, which is the name of the 2013 law that introduced the bonus cap.

The document also cements the authority's position that banks cannot issue so-called allowances to get around the bonus cap.

That cap, which limits bankers to bonuses equal to one or two times their annual salaries, inspired banks to invent new pay categories that they designated as fixed pay in an attempt to bolster overall pay. Instructed by the European Union to look at the allowances, the authority said in October that they were not fixed pay, but 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, in line with the letter and purpose" of the 2013 law the authority said in October.

The guidelines issued on Wednesday kick off a three-month consultation period in which the industry can respond. The authority will then issue a final draft this year, in time to be applied to 2015 pay. (The bonus cap has been in effect since Jan. 1, 2014. The guidelines are meant to clarify what the rule means and how the banks should apply it.)

The guidelines elaborate how to identify staff affected by the bonus cap -- so-called material risk takers -- as well as clarifying fixed and variable compensation. This time, the authority tried to leave little room for banks' creative interpretation. …

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