The Bank of England has defied the European financial regulator and insisted that it will not impose bonus restrictions on senior figures at fund managers and small stockbrokers, banks and building societies.
In open resistance to the European Banking Authority, the Bank said that it would not comply with new European Union-wide guidance under which small financial institutions, those with assets of less than £15 billion, would have to follow the same bonus restrictions already imposed on big banks.
This is the regime under which no bank can pay a bonus to senior figures of more than 100 per cent of base pay, or 200 per cent with the approval of shareholders. It has been operating for large banks since 2014.
The Bank’s stand is likely to please small lenders and, in particular, asset managers and hedge funds, which sometimes pay bonuses to senior figures and star fund managers of as much as five or ten times base pay.
“This will come as a big relief to smaller banks and asset managers in the UK which had been concerned that the cap would apply to them from 2017,” Alex Beidas, an employment partner at Linklaters, said.
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At present, the rules restrict bonuses at an estimated 30 City companies. The extension of the rules could have brought hundreds, possibly thousands, more into the net.
Andrew Bailey, deputy governor of the Bank of England, said that he was invoking the principle of proportionality to exempt smaller firms because they posed much less of a threat to the financial system.
The stance comes after the EBA ruled in December that member states should not use the proportionality argument to sidestep the new rules.
The Bank’s Prudential Regulation Authority and the Financial Conduct Authority have waged a war on restrictions on bonuses, which they argue have a counterproductive effect, pushing up base pay and allowances and making it harder for banks and other financial institutions to cut costs in difficult times. They also have argued that it makes it more difficult to punish misbehaving bankers because any bonuses that are clawed back are smaller than they otherwise would be.
The Bank is allowed to exempt itself from EBA guidance under “comply or explain” rules. However, the European Commission is looking at a new directive that might compel obedience.
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“This is not the end of the story,” Ms Beidas said.