UK to implement EBA guidelines on role-based allowances paid by banks and investment firms, but hope remains for proportionate approach say experts

Out-Law News | 20 May 2015 | 10:21 am | 3 min. read

European Banking Authority (EBA) guidelines requiring banks and investment firms to change the way they classify 'role-based allowances' (RBAs) paid to senior staff will take effect in the UK from next year, the head of the Prudential Regulation Authority (PRA) has said. The draft guidelines are currently subject to public consultation, but the PRA clearly does not expect that this aspect of the guidelines will change.

However Andrew Bailey, who is also a deputy governor of the Bank of England, told a conference on financial regulation hosted by Reuters that the UK had not dropped its opposition to EU-wide restrictions on senior staff bonuses on the grounds that they push up fixed pay. He also said that the UK hoped to be able to continue to apply the remuneration rules "proportionately", despite the EBA's position that all the rules must be applied by all firms regardless of size.

Financial services remuneration expert Matthew Findley of Pinsent Masons, the law firm behind, said that many firms that were not considered to be 'systemically important' currently had some flexibility around the rules on pay set out in the latest version of the EU's Capital Requirements Directive (CRD IV).

"If the EBA guidelines come into effect without greater flexibility, which may require input by the EU legislature, then they will have a substantial impact on many more firms, including those that are not as systemically important and which are currently allowed to disapply several CRD IV remuneration requirements," he said. "These firms will need to revise their remuneration structures by the beginning of 2016 if the guidelines are adopted in their current form."

"It was encouraging that the PRA had publicly and vigorously criticised the CRD IV bonus cap as 'bad policy'. That will have raised hopes that the PRA would continue to accept RBAs as fixed remuneration. Some commentators even suggested that a national authority might reject the guidelines' approach to RBAs with little risk of a challenge at the EU courts. Those hopes now seem too optimistic; however, in the longer term the PRA has laid down a clear marker that it will reopen the issue when CRD IV is reviewed. The EBA and Commission are required to review the CRD IV remuneration rules and report on them to the EU legislature by 30 June 2016," he said.

Findley said that the debate about whether RBAs should be classified as 'fixed' or 'variable' remuneration seemed to have taken place "too late and at the wrong level - that is, among regulators rather than with the EU co-legislators" for the PRA's objections to make much difference.

"The bonus cap is EU law; the EBA's interpretation of it fits the EBA's enforcement, rather than policy-making, role; and the EBA and PRA are required to aim for harmonised regulation across the EU," he said.

The CRD IV bonus cap came into force at the start of the year and restricts senior staff bonuses to 100% of their fixed remuneration in any given year, or 200% with the agreement of shareholders. Some EU banks and investment firms, including those based in the UK, pay senior employees additional RBAs that are "linked to the[ir] position and organisational responsibility", and in some cases had classified these as part of fixed pay packages. However, in October the EBA issued an opinion stating that these should instead by classed as variable remuneration as they did not fulfil the necessary criteria for classification as fixed pay.

The EBA has since called for financial services regulators across the EU to "use all necessary supervisory measures" to ensure that payments to bankers that are not "predetermined, transparent to staff [and not] permanent" are reclassified as variable pay and so included within the bonus cap. The PRA's Andrew Bailey told the Reuters financial regulation event that UK firms would not have to "rip up" their existing pay policies but rather "amend the terms". This would, however, "make the allowances more fixed and the scope to withdraw them ... that much more limited", he said.

"UK-based banks and investment firms within CRD IV will now probably need to live with the bonus cap as interpreted by the EBA and, if they can, try to limit the growth of fixed remuneration by other means," said financial services employment expert Steven Cochrane of Pinsent Masons.

"One irony is that the cap as interpreted by the EBA may work against another, arguably more effective, provision of CRD IV that is also aimed at the appropriate linkage of long-term risk and reward: the requirement to deliver variable remuneration in the form of deferred and retained equity, or a similar form. This is because the draft guidelines seem to apply the cap to the value of shares at the time of vesting, rather than grant, which would undermine the standard and widely-used approach to share-based long-term incentives. That is one aspect that hopefully will be amended, or at least clarified, in the final version."