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By Huw Jones and John O'Donnell
LONDON/BRUSSELS, Feb 6 (Reuters) - The European Commissionhas asked the Bank of England to explain how new allowances inBritish bankers' pay comply with an EU bonus cap, an official atthe bloc's executive said, a new flashpoint of friction over thereach of financial control.
Under EU rules, from 2015 bonuses cannot be more than fixedsalary, or double this amount with shareholder approval, andmost of the bankers affected are based in London.
Banks including Barclays, HSBC and Goldman Sachs areexpected to raise the non-bonus part of remuneration with, forexample, monthly or quarterly "allowances".
The European Commission official said the executive hasasked the European Banking Authority (EBA), an EU watchdog, toseek an explanation on such extra payments from the BoE'sPrudential Regulation Authority (PRA).
"A report is expected next week," the official said.
The EU executive has powers to fine countries that fail toapply its rules properly.
The PRA said bank remuneration policy is frequentlydiscussed but it would not comment on any ongoing discussions.
Britain is challenging the bonus cap in the EU's top court,arguing it goes beyond EU powers and will push up fixed pay,making banks riskier as they will not be able to trim costsquickly in rocky markets.
The EBA could not be reached immediately for comment.
It will publish guidelines this year with a more precisedefinition of what constitutes variable and fixed pay, theCommission official said.
"We will encourage the EBA to take a strict approach in thisexercise," the official said.
A spokeswoman for EU financial services chief MichelBarnier, who is responsible for enforcing EU financial servicesrules, said the Commission has no detail yet from banks aboutallowances so it was hard to reach a firm position on them.
"We will monitor very closely with EBA that rules arecorrectly implemented and applied," she said.
Banks say they are not trying to circumvent the cap as theyconsider allowances to be part of fixed pay while offering thelender more flexibility to cut costs if markets turn sour.
A person familiar with the PRA talks said the EU watchdog ismeeting bank regulators from all member states individually tosee how they are complying with the new rules. Banks are mullingsimilar allowances for staff elsewhere in the EU.
The remuneration plans for the coming year presented bybanks in Britain will affect bonus payouts next year and theperson said that the PRA views them as complying with EU rules.
The PRA considers allowances part of fixed pay under the EUrules and hence they affect the bonus calculation, the personsaid. The allowances relate to a banker's job description andcannot be changed over the coming year, the person said.
Barnier's spokeswoman said under the EU rules pay is eitherfixed or variable with "no third form" permissible.
"One would expect banks to interpret this in a common senseand straightforward way without trying to circumvent it byincluding in fixed remuneration elements which actually vary inlevel," the spokeswoman said.
Martin Wheatley, chief executive of the UK Financial ConductAuthority, which is also scrutinising bank pay plans, said onTuesday the cap was creating "peverse" effects by bumping upbasic salaries.
