U.K. regulator hits back at bonus cap as EU readies expansion

Bonuses limited to twice fixed pay

Martin Wheatley, the top U.K. markets regulator, criticized a European Union cap on banker bonuses as the bloc’s banking watchdog prepares to expand the limits to thousands more financial-industry employees.

Wheatley, chief executive officer of the Financial Conduct Authority, told an audience of London financial executives that the bonus cap would drive up basic salaries and limit regulators’ ability to “punish poor behavior.”

The EU’s European Banking Authority may release draft rules as soon as today that accounting firm PricewaterhouseCoopers LLP said will “significantly increase” the scope of rules that block bonuses of more than double fixed pay. The EBA will define anyone earning more than 500,000 euros ($762,000) as a “risk- taker,” ensnaring them in the rules, according to PwC.

“I’m not sure it’s a good thing,” Wheatley said yesterday. The last time U.K. regulators “focused on bonuses, banks increased the salary of their VPs by 100 percent,” he said.

The EU brokered a deal in February to outlaw banker bonuses that are more than twice fixed pay, a move lawmakers said would prevent excessive payouts and curb irresponsible risk-taking. U.K. Chancellor of the Exchequer George Osborne opposed the curbs, saying they would harm the competitiveness of the nation’s finance industry.

Tough Rules

“The banks failure to put their own house in order has resulted in these tough new rules,” Arlene McCarthy, a U.K. Labour lawmaker at the European Parliament said last month. The bonus caps aim “to put an end to the excessive risk culture which lead to taxpayer bail-outs and bank collapses,” McCarthy said.

The EBA proposal will increase the number of employees subject to the pay limits by as much as 10 times at some investment banks, PwC said.

“This expansion of the definition of risk takers will see substantially more individuals working in the banking industry being hit by tougher pay rules, including being subject to bonus caps from next year,” PwC partner Jon Terry said in an e-mailed statement.

Before the latest version of the EBA rules, the U.K. had 1,300 so-called code staff that would have been affected by the cap, Andrew Bailey, CEO of the U.K.’s Prudential Regulation Authority, said on March 13.

According to “back of the envelope” calculations, employees might get as much as 500 million pounds more in base pay to offset the limit, he said.

Regulatory ‘Anguish’

“A lot will turn on how agreed wording is interpreted,” Nicholas Stretch, a partner at London law firm CMS Cameron McKenna, said in an e-mailed statement. “But once again we see that regulators can cause just as much anguish as politicians on pay.”

Barclays Plc paid 1.85 billion pounds in bonuses to employees for 2012, compared with 733 million pounds in dividends, the lender’s annual report shows. It paid 428 bankers more than 1 million pounds last year, more than any other U.K. lender.

HSBC Holdings Plc, which awarded 204 employees more than 1 million pounds in 2012, second only to Barclays, paid $3.7 billion in bonuses, less than half the $8.3 billion it paid in dividends.

Bloomberg News

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