EU approves cap on bankers' bonuses

7 July 2010 0:00 am | Updated: 7 July 2010 4:03 pm | By Helen Pow

MEPs also toughened up rules on the capital reserves that banks must hold.

Upfront cash bonuses will be capped at 30 per cent of the total bonus and at 20 per cent for particularly large bonuses.

Between 40 per cent and 60 per cent of any bonus must be deferred for at least three years and can be recovered if investments do not perform as expected. At least 50 per cent of the total bonus would be paid as contingent capital and shares.

Bonuses will also have to be capped as a proportion of salary. Based on EU guidelines, each bank will have to establish limits on bonuses related to salaries in a bid to bring down the “disproportionate” role played by bonuses in the financial sector.

Bonus-like pensions will also be covered under the new law, which will introduce special measures for bailed out banks. In particular, the rules state that no bonuses should be paid to the directors of an institution unless this is duly justified.

New capital rules for re-securitisations and the trading book will ensure banks properly cover the risks they are running on their trading activity, including for types of investments such as mortgage-backed securities that were central to the crisis, according to the EU.

It says the rules will likely lead to banks having to hold three to four times more capital against their trading risk than they do currently.

The legislation on bonus provisions will then take effect in January 2011 and those on capital requirements provisions before January 2012.

MEP Arlene McCarthy says: “Two years on from the global financial crisis, these tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk-taking. A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price. Since banks have failed to reform we are now doing the job for them”.

Meanwhile, the EU parliament has separately called for remuneration policy principles to be extended to cover all companies listed on stock exchanges.

CMS Cameron McKenna partner Nicholas Stretch says: “The European legislation leaves considerable flexibility to national regulators. The FSA was already planning to review its Remuneration Code this summer.

“The EU legislation may force its hand but there is still considerable scope for UK discretion and we hope the regulator will be level-headed in applying rules in areas where there is little element of risk and will strip out the politics in the European legislation.”

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