The European Banking Authority (EBA) introduced bonus caps to big banks two years ago. It was in response to the financial crisis when some argued that huge bonus rewards encouraged managers to take unnecessary risks that could destabilise our banking system.
In December, the EBA decided they wanted to extend the rules on bonus caps, which limit bonuses to 100 per cent of salary, from the 100 or so large banks to apply to all small banks, funds and finance firms. In April, they are expected to announce the notice period, which would give EU member states two months to respond to their updated bonus cap guidelines.
The options available to EU member states are simple: comply with the changes and apply the bonus cap across the banking sector or explain your reasons for not doing so.
After speaking with his European counterparts, Andrew Bailey, the deputy governor of the Bank of England said: “This is a sensible outcome.” The UK is not alone, despite not having to respond yet many countries already have. Ireland, France, the Netherlands and Luxembourg have all already said they will not comply.
Why Has The UK Refused to Comply With EU Bonus Cap Rules?
The reason the UK has given for not applying EU bonus cap regulations to smaller banking sector firms is stability. They argue that by having no cap on discretionary bonus pay it gives banks greater flexibility – if they are financially healthy then they can afford to pay out big bonuses. If banks are not financially stable they only have to pay their employees’ salaries and these are not inflated.
To back up their argument UK banking authorities The Prudential Regulation Authority (PRA and the Financial conduct Authority (FCA) have pointed towards the affect bonus cap regulations have had inflating pay within large banks in the UK. Numerous employers have switched how they pay their employees – awarding less in bonuses but more in fixed pay.
Increasing fixed pay as a percentage of total pay allows for less flexibility. If the UK complies with EU regulations on bonus caps and smaller banks do not perform well or if questions over financial conduct arise, they do not have to pay discretionary bonuses. However, they will have to pay their employees’ salaries, which are likely to increase (in order to retain staff), if the UK were to apply the EBA bonus cap rules.