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* EU bonus cap to cover payouts from early 2015
* EBA: role based allowances part of bonus, not fixed pay
* Banks must change non complying allowances by end December
* Up a few thousand bankers affected, largely in London
* Lawyers expect scramble to re-write pay contracts
By Huw Jones
LONDON, Oct 15 (Reuters) - The bulk of a new type ofallowance paid to bankers are in breach of the European Union'sbonus cap and must be changed by the end of the year, the EUbanking watchdog said on Wednesday, raising the prospect thatbanks will have to bump up basic pay or risk losing top staff.
The sight of bankers pocketing hefty sums at a time whenmany people are hit by pay freezes and high unemployment acrossEurope prompted the EU to cap the bonuses of bankers earningmore than 500,000 euros ($630,000).
The bonus cannot be more than basic pay, or twice thatamount with shareholder approval.
With banks having to be bailed out by taxpayers in thefinancial crisis, the world's toughest curb on banker pay aimsto stop reckless bankers who hope that taking bigger risksequates to fatter rewards.
Wednesday's ruling from the European Banking Authority(EBA)will hit up to a few thousand bankers, mainly in Londonwhere regulators gave allowances the green light as the Britishgovernment challenges the cap in the EU's top court.
Lawyers already predict a scramble to revise pay contractsto meet the deadline as the bonus cap comes into practicaleffect on handouts due in early 2015.
Barclays, HSBC and other banks are payingallowances to select staff.
Under the EU law, remuneration must either be classified asvariable and part of a bonus, or fixed. Banks say allowancescome under fixed pay and are essential to retaining staff in theface of global competition from New York and Singapore.
EU policymakers argued they are simply a ploy to circumventthe bonus cap and asked the EBA to investigate.
The EBA report said the vast majority of the new role-basedallowances are being wrongly classified as part of fixed pay.
It found 39 banks that cover the bulk of European bankingpaying "role based" or "market value" allowances, with the vastmajority of role-based allowances breaching EU law.
For a role-based allowance to be part of fixed pay, it mustbe permanent for that specific job, pre-determined,non-discretionary, non-revocable and transparent to all staff.
In "most cases", however, this type of allowance wasdiscretionary and affected the bonus cap, EBA said.
EBA gave the nod to routine allowances for specific purposessuch as childcare, regular pension contributions, travel andhealth insurance.
Additionally, "market value" allowances paid to everyemployee working outside their home country to cover highercosts were also acceptable.
"Whereas findings in the report showed that most of theallowances, which were the subject of the EBA investigation, didnot fulfil the conditions for being classified as fixedremuneration, namely with respect to their discretionary nature,which allows institutions to adjust or withdraw themunilaterally, without any justification," EBA added.
These role based allowances were found not to be included inbasic pay, were not pensionable, often granted for only a yearand with a written acceptance they can be withdrawn.
EBA said banks using allowances that don't comply mustrewrite their remuneration policies by Dec. 31 so that theallowances are properly classified in time for bonus payouts duein early 2015.
National regulators should also take "all the appropriatesupervisory actions" to make sure allowances comply with EBAguidance, the watchdog said.
EBA's board, on which Britain's Bank of England sits, isthought to have unanimously backed the report's findings andrecommendations.(1 US dollar = 0.7904 euro) (Reporting by Huw Jones; Editing by Giles Elgood)
