MEPs To Vote On Bank Bonus Curbs

by Ulrika Lomas, for LawAndTax-News.com, Brussels

06 July 2010

New rules, aimed at ending bankers' risk-taking culture by placing a cap on bonuses, have been agreed between the European Council (EC) and the European Parliament (EP).

The EP has expressed its confidence that the agreement delivers tough and effective rules that will cover all bonuses awarded or paid from 2011 onwards. It hopes that the new rules will lay the foundations for a responsible pay and bonus policy in the banking system, while it has been suggested that they will also be extended to cover hedge funds.

Arlene McCarthy, who has been steering the bonus rules through the EP, said: "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. The public want banks to prioritize stability and lending over their own pay and perks.”

The new rules are meant to link reward to long-term performance. Cash bonuses will be capped at 30% of a banker’s total bonus, and to 20% for particularly large bonuses. In place of upfront cash, between 40% and 60% of any bonus must be deferred and can be recovered if investments do not perform as expected. Moreover, at least 50% of the total bonus would be paid as "contingent capital" (funds to be called upon first in case of bank difficulties).

Bonuses will also have to be capped to salary. Each bank will have to establish limits on bonuses related to salaries, on the basis of European Union-wide guidelines, to help bring down the overall, disproportionate, role played by bonuses in the financial sector.

Finally, bonus-like pensions will also be covered. Exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the underlying strength of the bank. This will avoid situations, the EP said, similar to those experienced recently, in which some bankers retired with substantial pensions unaffected by the crisis.

Finally, to address moral hazard, the law will introduce special measures for bailed out banks and it will restrain the overall amounts paid in bonuses, encouraging bankers to prioritize a stronger capital base. The rules will also require that the repayment of taxpayers is the priority.

Following official agreement from the EC on June 30, the text will now be submitted to the EP, with a vote on July 7. The bonus rules are then expected to take effect in January 2011.

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