Fixed income

15 October 2014 By Dominic Elliott, George Hay Follow @gfhay

The European Banking Authority has come down hard on banks using allowances to retain pay flexibility in the face of the bonus cap. Its view isn’t binding on supervisors. But if it prevails, the sorry outcome will be stubbornly higher fixed pay.

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European regulators said on Oct. 15 that most forms of allowances that banks have been paying to mitigate the effect of the region’s cap on bonuses are in breach of the new rules, and should be abolished by the end of the year.

The European Banking Authority (EBA), which investigated allowances at the 39 institutions that pay them, found that “in most cases” new payments made since the bonus cap came into law at the start of this year failed to meet what it termed the “conditions for being classified as fixed remuneration.”

From the start of next year, allowances will have to be permanent, pre-determined, non-discretionary, non-revocable and transparent to staff, the EBA said.

That means they cannot be adjusted or cancelled at the whim of the employer, changed in response to market conditions, or reviewed more than once a year.

The EBA will publish formal guidelines on allowances and pay at the end of the year that will be considered by the European Commission and could be codified into law next year.

Banks that have already paid non-conforming allowances could have to change their contractual details or else be forced to count them as bonuses. The European Commission permits maximum variable compensation of two times fixed salaries, assuming shareholders approve.

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