EU bans banks from dodging bonus rules

‘NAKED attempts’ by British banks to dodge pay curbs for top executives have been blocked by European authorities.

The bonus cap was imposed by Brussels last year and restricts banks to awarding bonuses of 100 per cent of basic pay, rising to 200 per cent if shareholders approve.

But in an effort to sidestep the restrictions, all the major UK lenders have responded by introducing new ‘role-based allowances’ for their best paid staff which are typically worth around one year’s salary and are paid in shares.

These huge windfalls have been used to inflate employees’ pay packages – enabling banks to pay higher bonuses without breaching the cap.

Now the European Banking Authority has ruled this tactic – used by HSBC, Barclays, Royal Bank of Scotland and Standard Chartered – violates EU laws.

Pointing out that this ploy is most prevalent in the UK, it said some of these payments should be classed as bonuses rather than basic pay.

The Bank of England has agreed to ensure banks comply with the edict when it comes into force next year. It is a blow to banks across the EU, which will either have to cut pay packages for their top staff to comply with the bonus cap or find other ways of getting round the rules.

Industry insiders said banks are most likely to respond by simply increasing basic salaries for senior executives.

One MP applauded the crackdown by the EBA and urged regulators to keep a close eye on how lenders respond.

John Mann, a Labour member of the Treasury select committee, said: ‘Banks shouldn’t have been paying these allowances in the first place.

‘It is very naked attempt to get around restrictions on pay and they have been caught out. Everyone other than the bankers should be delighted by this news.’

But he cautioned: ‘Any attempt by banks to increase basic pay will just be seen as another way of putting two fingers up to the taxpaying public.’

A spokesman for the British Bankers’ Association criticised the EBA’s latest ruling. He said: ‘Any move which increases fixed costs and reduces the ability to use these tools seems counterintuitive.’

But a source at one UK regulator said the latest crackdown would have limited impact and that banks would merely have to tweak the way they use rolebased allowances to comply with the European rules.

A Bank of England spokesman said: ‘The Bank of England has already made clear to all firms that it expects allowance structures to be compliant with the EBA...All firms have either already implemented necessary changes, or committed to do so subject to shareholder approval of the remuneration policy.’