London / Bloomberg
The Bank of England (BOE) defied European Union regulators by retaining a bonus-cap exemption for smaller UK financial firms, as the bloc’s policy makers reassess remuneration rules that have been repeatedly blasted by British regulators.
The BOE and the Financial Conduct Authority (FCA) said that they will comply with all EU remuneration rules apart from applying the restriction on bonuses of more than twice fixed pay to all firms.
In December, the European Banking Authority (EBA) said the bonus cap “should not be subject to any exemption,” even as it called for EU law to be changed so that rules on “deferral arrangements and pay out of instruments” could be put aside for “small and non-complex institutions and for staff that receives only a small amount of variable remuneration.” The European Commission, the EU’s executive arm, plans to complete a review of the remuneration rules by mid-year.
“We have followed the principle of proportionality, which in practice means that smaller firms which pose less risk to the safety and soundness of the financial system face lower regulatory requirements,” BOE Deputy Governor Andrew Bailey said. “This is a sensible outcome.”
Senior BOE officials have consistently attacked the restriction on bonuses, with Bailey saying late last year that the cap is “a piece of bad policy, because it creates the wrong incentives.” Many banks, particularly in the UK, have given employees cash allowances depending on seniority, known as role-based pay, to evade the bonus limit.
Some firms have “markedly increased fixed pay as a percentage of total pay” since the bonus cap was introduced, and this makes it harder for them to cut costs in hard times and limits their ability to manage financial and conduct risks, the BOE and FCA said.
The “blanket extension” of the bonus cap to all firms would “exacerbate these impacts, and fails to recognize the different incentives and consequences for risk-taking” across all firms “by disregarding the size, internal organization, nature, scope and complexity of their activities,” the regulators said.
Large and systemically important banks must continue to apply the bonus cap, the UK regulators said. Smaller firms can continue to “determine an appropriate ratio between fixed and variable remuneration for their business while not applying the bonus cap,” they said.
The EBA has “acknowledged the huge diversity of national rules regarding the application of proportionality, including the waiving of requirements, which has led to an uneven playing field between institutions across the EU,” spokeswoman Franca Rosa Congiu said, while
reiterating the regulator’s opinion.
that the bonus cap “should not be subject to any exemption.”
The EBA is working closely with the commission on its review of the remuneration rules, she said.