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EU Casts Wider Net for Bank Bonuses

Daniel Grill

EU regulators confirmed on Tuesday that they will cap bonuses of bankers earning more than 500,000 euros a year and added other conditions to make the pay ceiling harder to smash.

The headline figure was leaked last Friday, triggering warnings by banks in the European Union that they may lose staff to other parts of the world, and that London, the bloc's top financial centre, could be damaged.

Accounting firm PwC predicted that the number of London bankers affected will be 10 times the number hit by current pay curbs. The European Banking Authority (EBA) said the purpose of the draft rules, out for public consultation until Aug. 21, is to have a common definition for national regulators within the EU to decide which bankers will come within the pay curb net.

(Read More: EU Bonus Cap Could Hit 10 Times as Many London Bankers -PwC)

The EBA is fleshing out a new EU law that includes the bonus cap, which lawmakers say is needed to crack down on excessive risk-taking at banks. The cap will hit bonuses awarded for 2014 and due to be handed out in early 2015.

The EU already applies a tougher version of bank pay limits agreed by world leaders during the financial crisis and the cap will be the toughest curb of its kind in the world.

Based on data from 23 banks, the EBA said that the new rules would capture 4,796 staff when the 500,000 euro threshold is applied, compared with 1,792 staff affected by current remuneration curbs.

(Read More: European Union Set to Widen Bonus Clampdown)

The average total pay of risk-takers in 2011 was 508,000 euros, based on data from 110 banks, the EBA said.

Net Widened

Lawyers said that the EBA's criteria will bring far more bankers within the regulatory net than existing curbs that are limited to deferring parts of a bonus over several years.

"It will have a disproportionate effect on London compared with other European centres, which have smaller numbers of people earning at this level, and will further handicap London's ability to compete for talent on the world stage," said Stefan Martin, an employment lawyer at Allen & Overy.

(Read More: Barclays on Bonus Caps: We Don't Need Rules)

Chris Mordue, an employment lawyer at Pinsent Masons, said that existing EU curbs have forced banks to defer bonuses and claw back awards for performance that proved illusory.

"The irony is that the bonus cap could reverse this positive trend if fixed pay is simply increased to beat the cap and retain current overall remuneration levels," Mordue said.

Employee bonuses will be capped if they meet one or more of three conditions related to:

- actual or relative pay

- whether the employee is a major risk-taker

- whether the bank itself deems the employee's bonus should be capped.

The EBA also proposed a narrowly defined get-out clause. If employees come within the net only because of how much they are paid, banks can exclude them if they can show that he or she has no material impact on how much risk the lender takes on. There will be no escape for those earning more than 500,000 euros or for major risk-takers.

(Read More: Isolated Britain Fails to Avert EU Bank Bonus Cap).

The EBA will hold a public hearing in London on July 4. The regulator has little wriggle room to water down the rules in the face of an inevitable outcry from bankers. The European Parliament can reject them and call for a tougher set if it thinks the EBA has strayed from the framework law.

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