Věra Jourová, the member of the European Commission in charge of the pay rules, has concluded that new bonus rules will either have to be applied more flexibly or redrafted, according to people briefed on the matter.
The reassessment arose from a bureaucratic bungle, those people said. Officials belatedly realised that exemptions built into previous rounds of EU legislation had disappeared in post-crisis bank law which came into effect at the start of 2014.
UK regulators estimate that an end to current exemptions would force them to apply the rules to 1,000 brokerages and other finance companies supervised by the Financial Conduct Authority, as well as to a further 200 banks supervised by the Bank of England’s Prudential Regulation Authority.
The issue has focused on how to protect smaller financial companies from having to comply with rules on minimum waiting periods for bonuses to be paid out, as well as on the payment of parts of bonuses in shares.
National banking regulators have warned that these issues risk landing brokers and smaller banks with big administrative costs even though the companies have relatively small bonus pools. This, it is feared, could make it harder for them to attract top talent compared with hedge funds and others that do not have to comply, while adding little in terms of financial stability. Larger banks are also concerned about having to extend rules to previously exempt staff, such as in their asset management divisions.
The commission is exploring whether there is any remaining flexibility in the law that could be used to solve the problem. Failing that, legal fixes will be included in revised bank capital rules that the commission is set to propose later this year.
Another issue for the European Commission is that the European Banking Authority, a group bringing together national bank regulators from throughout the EU, has been clear that according to its analysis, the law needs to be reopened to fix the problem. This stance was backed last year by the commission’s own lawyers.
The EBA said in December that regulators would use their own authority to delay requirements for smaller firms to comply with the rules to January 2017, giving the EU breathing space to find a solution.
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