New interpretation means EU laws could apply to previously exempt staff
EU rules governing banker’s bonuses, which include bonus caps and payment deferrals, could expand to cover more bank employees, a sector lobby group has warned.
The European Banking Federation (EBF) says that a legal reinterpretation of the current rules could see them apply across the entire sector, removing the UK’s ability to offer exemptions where necessary.
If the EBF’s interpretation is correct, it means smaller banks, investment brokers and staff in sectors like asset management, which are currently exempt from the rules, will be caught. Guidelines on how these rules should be applied will be released by the European Banking Authority (EBA) by the end of the year, according to The Financial Times.
However, the main concern for HR will be the increases in red tape that any proposals will create, says Nicholas Stretch, incentives partner at law firm CMS.
“It’s the compulsory nature of it and the fact that it’s got to comply with a lot of regulatory rules and process rather than just using HR’s common sense that is worrying people,” he says.
Exempt no more
At the moment, national regulators such as the UK’s Financial Conduct Authority can decide the extent to which EU laws should apply. For example, UK institutions with assets of less than €50bn are currently exempted.
Simon Hills, British Bankers’ Association executive director for prudential capital and risk, says: “It is crucial that these new remuneration rules are implemented in a sensible way. The original EBA guidelines enabled countries to apply them proportionately.
“They were designed to apply to banks with large operations in the international wholesale markets, not smaller retail banks serving their communities.”
For reward specialists at smaller institutions, Andrew Taggart, employment partner at law firm Herbert Smith Freehills, suggests HR will need to ‘watch this space’ for the upcoming EBA guidelines. He says: “I don’t think there’s anything small banks can do proactively. They’re going to have to wait and see what the guidance says.”
Bonuses capped around the globe
Current EU rules cap bonuses at a person’s salary, or at twice a person’s salary with shareholder approval. In late 2014, the government rejected attempts by the Royal Bank of Scotland to pay bonuses of more than 200 per cent of salaries. Although, the UK had previously lobbied against a cap on bonuses, but it dropped this legal challenge in November 2014.
If the rules are extended to smaller institutions, it means they will have to cap bonuses for all their global staff in the same way larger banks already do.
Tom Gosling, reward partner at consultancy firm PwC, says: “If you’ve got a massive established operation, which is consistently revenue generating then, in some respects, if you have to change the compensation mechanism then it’s not the biggest problem in the world.
“But, if you’re a small organisation that’s got staff in operations around the world, that can be a big issue for the commercial liability of those businesses.”
Pay rises all round?
If bonuses are being capped, why not just increase salaries? According to Gosling, it could be as simple as that. “That’s kind of what firms do in response. There’s no particular magic beyond that,” he says.
Taggart suggests that commercial factors will prevent pay rises from getting out of hand. “I suspect there’s a limit to how much salaries will be increased as that’s often about cash flow, certainly so if you’re relatively small,” he says.
Gosling says that increasing pay will have implications when letting people go. “If you’ve got somebody on a million pounds a year, whereas, in the old world, you might have paid them £150,000 base salary, if you fire them and have to give them 12 months notice or several month’s pay, that’s a very different issue if you now pay them a million.”