REUTERS SUMMIT-BoE says banks must comply with EU pay allowances rules

(For other news from Reuters Financial Regulation Summit, clickon http://www.reuters.com/summit/FinancialRegulation15)

By Huw Jones, Steve Slater and Matt Scuffham

LONDON, May 15 (Reuters) - British banks must rewritecontracts for senior staff to comply with new European Unionrules banning top-up "allowances" that breach a cap on bonuses,the Bank of England (BoE) has said.

Banks have been giving key staff allowances on a monthly orquarterly basis to bump up their basic pay and soften the impactof the curb on bonuses - which can be no more than fixed pay ortwice that amount with shareholder approval.

Last October the EU's banking watchdog, the European BankingAuthority (EBA), said the bulk of allowances being paid tothousands of bankers, mostly in the UK, breached the EU bonuscap law as they were discretionary payments.

BoE Deputy Governor Andrew Bailey has told banks they haveto change their pay contracts to comply with EBA rules.

"Many of them don't need to rip them up. They need to amendthe terms," Bailey told the Reuters Financial Regulation Summit.

"The effect is to make the allowances more fixed and thescope to withdraw them is that much more limited," he added.

Bailey, who heads the BoE's supervisory arm, the PrudentialRegulation Authority, said the EBA's guidance came too late toapply it to pay and bonuses awarded for 2014, but will apply for2015.

He reiterated his opposition to the bonus cap on the groundsthat it causes fixed pay to go up, making it harder forregulators to claw back pay when misconduct is uncovered.

"It's a bad policy and it's got the wrong incentives," saidBailey, who marks 30 years at the BoE this month.

Britain failed to stop the bonus law being passed andwithdrew a legal challenge in the EU's courts.

Banks last week criticised the EBA rules for not being"proportionate" and too inflexible by forcing lenders to deferportions of even very modest bonuses over several years,creating an administrative headache.

But the EBA said it was not possible under the EU law togrant waivers on deferrals.

Bailey said Britain has been applying bank remunerationrules more lightly on smaller firms but it was unclear how thiscould continue under EBA's new rules.

"I don't want to change from what we are doing and what weare doing is applying proportionality. It's still a very liveissue," Bailey told the summit, held at the Reuters office inLondon.

PPI CUT-OFF?

Bailey said the banking sector was "substantially morerobust" since the BoE's stress test of lenders last year butmisconduct still casts a shadow over the sector.

Several of Britain's banks have been fined for allegedmanipulation of interest rate benchmarks and currency markets.

Banks have also set aside more than 24 billion pounds ($38billion) in compensation for mis-selling loan insurance, knownas PPI, and ratings agency Standard & Poor's said that couldrise by another 5 billion pounds.

The Financial Conduct Authority is considering whether toset a cut off point for claims and Bailey said there was a needto find some way of finishing the process.

"The thing about PPI is the process for dealing with it hasnot been designed with an end point. Eventually there has to be.There must be a point where you say enough is enough, but thatisn't easy," he said.

Bailey said he assumed there would be a "fair degree ofcontinuity" in regulatory policy since the centre-rightConservative Party was returned to government last week.

"My overwhelming desire is to see greater stability in theinstitutional structure of regulation. We need it to be stable,"Bailey said.

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For more summit stories, see (Reporting by Huw Jones; Editing by Elaine Hardcastle)