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* EBA: role-based allowances part of bonus, not fixed pay
* Banks must change non complying allowances by end December
* Ruling puts EBA on collision course with Britain
* Ruling mostly affects bankers in London
* PwC says outcome is at most severe end of expectations (Adds comments from BBA and IoD)
By Huw Jones and Steve Slater
LONDON, Oct 15 (Reuters) - New types of allowance paid tobankers are nearly all in breach of the European Union's cap onbonuses 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) a year.
Bonuses cannot be more than basic pay, or twice that amountif shareholders approve.
With banks having to be bailed out by taxpayers in thefinancial crisis, the world's toughest curb on bankers' pay aimsto restrain the reckless who hope that bigger risks mean biggerrewards.
EU financial services chief Michel Barnier, who asked theEuropean Banking Authority (EBA) to compile the report, saidallowances sent a very bad signal to society that banks have notlearnt from the financial crisis or adapted their cultures.
"Compliance with both the letter and the spirit of the lawis a prerequisite to restore trust and stability in our bankingsystem," Barnier said.
PwC, a consultancy, said the ruling was at the most severeend of industry expectations and that the vast majority of bigbanks in the EU will need to change their pay policies.
Sources at UK banks said they would see how UK regulatorsapply the ruling, and it was unclear if bonuses covering 2014performance and to be paid in 2015 are affected.
The EBA's board vote that ruled the allowances illegal andset a deadline for changes was not unanimous, the watchdog said.
"LEAST WORST"
The Bank of England, an EBA board member and whosePrudential Regulation Authority had endorsed the allowances as a"least worst" alternative to a cap, declined to say how it votedor whether it would apply the new EU guidance.
Barnier said that in principle bonus payments handed outnext year will be affected, adding that the European Commissionand the EBA will decide if enforcement action is needed.
Wednesday's ruling will mainly hit bankers in London, whereregulators gave allowances the green light as the Britishgovernment challenges the bonus 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 effect onhandouts due in early 2015.
Barclays, HSBC and Standard Chartered have said they are among those paying allowances orplanning to, and sources said most other major banks are too,including JPMorgan and Goldman Sachs. About10,000 bankers receive the allowances, according to industryestimates.
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 retain 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 have called a spade a spade," said JohnThanassoulis, professor of financial economics at WarwickUniversity. "They have come down hard against this trick."
But he said banks would create more risks by increasingbasic pay, leaving them potentially unable to cut costs quicklyin a downturn.
Andrew Tyrie, chairman of the British parliament's TreasuryCommittee, which oversees the Treasury and the Bank of England,said the EU bonus cap was fundamentally flawed.
"It will encourage banks to increase fixed pay rather thanembed incentive structures that improve standards," he said.
The British Bankers' Association, which represents UK andoverseas banks, said any move that increased fixed costs andreduced pay flexibility was "counterintuitive," and Britain'sInstitute of Directors said the bonus cap was the wrong tool toreform bankers' pay.
"Encouraging banks to increase fixed pay, whether salary orone of these allowances, was clearly not the intention of thecap, and yet this is exactly what happened," said Oliver Parry,corporate governance adviser at the Institute of Directors.
WRONGLY CLASSIFIED
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.
The EBA gave the nod to routine allowances for specificpurposes such as childcare, regular pension contributions,travel and health 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.
The 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.
Jacqui Hatfield, a lawyer at ReedSmith, said the rulingclarifies that an allowance for a particular role and thatcannot be changed or clawed back should still pass muster.
Some 14.4 billion pounds ($22.9 billion) was paid in bonusesin Britain's financial sector in the year to April 2014, up 3percent from the year before but down from more than 18 billionpounds in 2007/08.
The average bonus per employee was 13,300 pounds ($21,250) in the financial sector last year, compared to 1,500pounds($2,400) across the whole UK economy, the Office forNational Statistics said.(1 US dollar = 0.7904 euro)(1 US dollar = 0.6283 British pound)(1 US dollar = 0.6258 British pound) (Additional reporting by Carmel Crimmins in Dublin; Editing byGiles Elgood)
