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EU bonus cap to raise fixed salary costs of big UK banks

Andrew Bailey warns on new EU restriction.

The fixed salary costs of Britain’s large banks are likely to rise by at least £500m per year if the European Union’s planned bonus cap becomes effective, according to the incoming chief executive of the Prudential Regulation Authority (PRA), Andrew Bailey.

The £500m figure was arrived at after examining the salaries and bonuses of nearly 1,300 staff at UK banks that would be covered by the EU cap and assuming the banks would boost fixed pay to avoid cutting total remuneration, said Bailey.

The EU rule would limit bonuses for top managers and traders to twice salary with shareholder approval.

Bailey, who will take up his new role in April, further added that bonus limit could weaken efforts to improve risk management at the UK arms of large overseas institutions. He also warned that the cap would undermine the system of bonus clawbacks for misbehaviour and poor performance.

The UK banks had cut their current bonus pools and clawed back prior year share awards to the tune of £2.5bn due to rate-rigging and mis-selling scandals, Bailey said.

“It will reduce the discipline in the system but it won’t reduce overall remuneration,” Bailey told Parliament’s Treasury Select Committee. “It will institute an unhelpful culture of banks spending their time finding ways to get around the rules.”

The EU rule could also weaken the UK’s efforts to force overseas banks to improve oversight and risk controls at their London operations.

Andrew Tyrie, chairman the Treasury Select Committee, said the message to the UK is clear. “On the EU bonus initiative, Mr Bailey was very blunt. He clearly thinks this is misguided at best, potentially counterproductive and likely to make his job more difficult.”

Bailey told MPs that UK banks needed more capital but that reorganising their businesses would address some of the problem.