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BoE slaps down EU regulator on small bank bonus caps

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The Bank of England has told the European Banking Authority that its proposed cap on banking bonuses is unfair to small firms.

The EBA’s Guidelines on Sound Remuneration Policies, published on 21 December, cap bonuses for firms subject to the Capital Requirements Directive at 100 per cent of an individual’s salary, or 200 per cent with shareholder approval.

But a statement on the Bank website says: “The approach to the bonus cap under the guidelines represents an interpretation of CRD with which neither the PRA nor the FCA agree.

“The PRA and FCA take a proportionate, risk-based approach to applying the bonus cap based on the wording under Article 92(2) CRD, which states: ‘competent authorities shall ensure that…institutions comply with the following principles [including the bonus cap] in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities’.

“The PRA and FCA take the view that the ‘extent’ of application in a proportionate manner may include not applying a remuneration principle in its entirety based on the size, internal organisation and the nature, scope and complexity of the activities of the firm in question. The PRA and FCA consider that the CRD proportionality principle applies equally to all numerical requirements, including the bonus cap, deferral, payment in instruments, and ex-post risk adjustment.”

The Bank says it will comply with all other parts of the guidelines, and all large and systemically important firms will have to apply the cap.

The statement says paying bankers in share bonuses is generally better than salaries, as it is easier to recoup shares in the case of misconduct.

The EBA will now have to approve the exemption for small firms.

Bank of England deputy governor Andrew Bailey says: “We have had an extensive debate on the issue of proportionality with our European counterparts.

“The PRA attaches a great deal of importance to the principle of applying policies in a proportionate manner consistent with the legal provisions.

“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. This is a sensible outcome.”

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