UPDATE 1-EU's Barnier seeks result of probe into banker allowances by end of Sept

* EU financial services chief fast-tracks response

* UK bankers say pay is shareholder, not political matter

* Britain takes bonus legal challenge to top EU court (Adds watchdog, banker reaction, background)

By Huw Jones

LONDON, Sept 8 (Reuters) - Banks use of so-called allowancesto soften a European Union cap on bonuses could face a"coordinated policy response", the EU's financial services chiefMichel Barnier has warned, prompting bankers to arguepoliticians should steer clear of pay.

The EU imposed controls on banker bonuses, blamed forencouraging risk-taking by staff whose year-end haul was linkedto their revenue-generating record, after taxpayers were forcedto shore up lenders whose shaky finances were suddenly exposedin the financial crisis of 2007-2009.

The controls limit payouts to the equivalent of anemployee's fixed salary, or twice that amount with shareholderapproval.

Barnier on Sunday asked the EU's banking watchdog, theEuropean Banking Authority (EBA), to wrap up by the end ofSeptember its probe into whether quarterly and monthlyrole-based allowances being paid by banks such as HSBC,Barclays, Citi should be allowed under the bonuscap rule.

But banks insist allowances are part of fixed pay and rejectaccusations from some European Union lawmakers and others thatthey are simply stealth bonus payments.

"Ultimately we think that decisions about pay is a matterfor shareholders and not politicians," the British Bankers'Association said on Monday.

The EBA had said it would complete its probe into allowancesand report back by the end of the year, with possible newguidance for banks before the cap takes effect on awards handedout early in 2015 for performance covering 2014.

But Barnier published a letter in which he asked the EBA tospeed up its timetable for the probe.

"It is important to show a collective, proactive stance onthis important matter and address the claims made that thespirit - if not the letter - of union law is being disregarded,"Barnier said in his letter to EBA Chairman Andrea Enria and madeavailable to the media.

"I would therefore be very grateful if you could share withus the results of your work on this issue as soon as possibleand at the latest by the end of September, in order to ensurethat we can address any concerns in a timely manner through acoordinated policy response," Barnier said.

STARTING POINT

Barnier, who did not say what this coordinated responsemight consist of, has the power to propose amendments to EU lawif he thinks it is being circumvented by bankers, a step someregulators say privately would be needed to make any changes.

A spokeswoman for the EBA said: "When we have deadlines wecomply with the deadlines. There will be interaction with thecommission on these findings.

"Once we gather the findings and see where the problem is,then that's the starting point for defining clear criteria forallocating the allowances to fixed or variable pay."

Britain's top banking supervisor, Bank of England DeputyGovernor Andrew Bailey, said in April that allowances were beingused to soften the blow of the bonus cap but were the "leastworst alternative".

Barnier's intervention came ahead of his scheduled departurefrom his post at the end of October, when a new commission takesover. It also came on the eve of a hearing in the bloc's topcourt on a challenge to the cap mounted by Britain.

"Britain has taken a global lead in efforts to tackleunacceptable remuneration practices in the banking sector, whichis why we oppose this EU-wide bonus cap, which was rushedthrough without a proper impact assessment and which couldundermine financial stability by leading to higher fixed costsat banks," the finance ministry said in a statement.

Britain, home to most of the bankers hit by the cap, willargue before the European Court of Justice in Luxembourg thatthe rule hands too much power to the EBA.

The cap breaches the EU's treaty by impinging on pay andfails to protect privacy, Britain will argue. The court is notexpected to rule on Britain's challenge until the end of theyear at the earliest.

Sven Giegold, a Green Party member of the EuropeanParliament's economic affairs committee which pushed through thecap, said going to court was a sign of weakness in UK arguments.

"Although we have no general competence to regulate pay, wedo have the power to use regulation to protect financialstability and that is the purpose of the bonus cap," Giegoldsaid. (Editing by Hugh Lawson and David Holmes)