UK Banks Cautiously Welcome EU Bonus Rules After 2009 Changes

By Patricia Kowsmann Of DOW JONES NEWSWIRES LONDON (Dow Jones)--U.K. banks could gain from a new set of rules on banker bonuses being discussed by European Union governments, after the country unilaterally applied stricter rules on pay last year, people familiar with the situation said Thursday. According to the new rules--which need the formal backing of the full Parliament assembly next week--cash bonuses will be capped at 30% of the total bonus, or 20% for particularly high bonuses. A large part of a bonus will also have to be deferred so it can be recovered if investments don't perform as expected, the European Parliament said Wednesday. Under the proposed rules, bonuses would be linked to salaries, with each bank setting a limit following broad EU guidelines, it added. With public outrage on bankers' bonuses intensifying amid the financial crisis, the EU is trying to appease critics, while also controlling excessive risk-taking. In an effort to contain public anger at home following large state bailouts of banks, the U.K. government imposed stricter rules on pay late last year, including by making banks spread out two-thirds of bonus payments to senior employees over three years in form of stock. "The majority of the remuneration proposals that have just been agreed in Europe were implemented in the U.K. last year," British Bankers' Association Chief Executive Angela Knight said in a statement. "In fact, the U.K. was the only country that took these steps and so the main consequence of this European decision is that other European countries will now have to follow suit," she added. Knight's comments were echoed by other industry insiders. "The main issue for the U.K. has been implementing changes alone, which clearly threatened its competitiveness in the global banking sector. Making rules EU-wide will soften these fears," a person close to the government's thinking said. The U.K. regulator, the Financial Services Authority, said it is currently evaluating the EU proposals and will respond accordingly during a review it will publish later this year. A person familiar with the situation said that while some of the EU rules will have to be adopted by all regulators, others are flexible, and their precise details will be up to each country to set. For 2009, most U.K. banks, including retail and investment bank heavyweight Barclays PLC (BCS), didn't pay any cash bonuses to senior management, and instead awarded stock that will vest over time and is subject to clawbacks. Some, including HSBC Holdings PLC (HBC), decided to defer all of executive director bonuses related to 2009 over three years and in form of restricted shares. Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC (LYG), which are 83% and 41% owned by the U.K. government, respectively, also didn't pay cash bonuses to senior executives. Many banks are still analyzing the new EU rules and the effects those can have on compensation practices. In addition, some fears remain that the U.S. and Asia could gain from strict pay rules being applied in the EU alone. BBA's Knight said politicians should keep in mind "that this is an international and mobile business." -By Patricia Kowsmann, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com (END) Dow Jones Newswires July 01, 2010 07:54 ET (11:54 GMT)