The controversial European law limiting bonus payments for bankers in the EU could be “one of the first things” on the scrap heap if the UK votes for a Brexit, according to City lawyers – but its removal would take years to negotiate.
The UK votes today on whether to remain a member of the European Union and Stefan Martin, a partner at law firm Hogan Lovells, said “The bonus cap…only applies because we are part of the EU. In theory, if we exit, that is something that [the UK] could repeal.”
The rules, introduced by the European Banking Authority in 2014 under CRD IV, cap bonus payments for regulated staff at 100% of salaries, or 200% with shareholder approval.
They are non-negotiable for member states and have prompted heated debate between European and UK regulators. In early 2016, the UK’s Financial Conduct Authority and Prudential Regulation Authority complained in a joint statement that the rules had seen affected firms markedly increase levels of fixed pay, thereby threatening their financial stability.
Ian Fraser, a partner advising financial institutions on employee incentives at law firm Simmons & Simmons, said he expected the bonus cap would be “one of the first things that the UK government would look to remove” in the event of a Brexit.
He said the cap was viewed as “counterproductive and retrograde” in the UK. “If they had a chance to get rid of it, or saw any competitive advantage in getting rid of it, they would,” he said.
But it would not happen overnight, the lawyers said.
Hogan Lovells’ Martin said the terms of an UK exit from the EU would need to be agreed before a removal of the bonus cap could be considered, and that is something that could take at least two years. Fraser added he did not think that repealing the rule “would necessarily be a very quick process”.
Others, however, said there was no guarantee it would be scrapped even in if the UK did vote out.
Barney Reynolds, a partner and head of financial institutions advisory and financial regulatory group at law firm Shearman & Sterling, said its removal would “be on the agenda” but that it “will be one of many bargaining chips in terms of access to the EU financial markets going forward”.
He said the UK’s ability to make changes to the way in which bonuses are paid would “be tied up” in whether it negotiates ongoing participation in the existing EU passporting regime. Passporting allows financial institutions approved by a regulator in one member state to carry out business in another member state on the basis they are all subject to equivalent regulatory standards.
A partner at another City law firm said this requirement for equivalence could put paid to any dramatic changes to bank bonus rules in the UK. They said: “We will need to be able to demonstrate that whatever legislation we put in place [to replace the bonus cap] achieves the same policy aims that the EU bonus cap was intended to.
“What that could mean is that less of a banker or traders’ pay is fixed and more becomes performance-based. But it’s unlikely that traders overall packages will go up significantly [or change dramatically].”
Another partner at a UK law firm in the City said retaining the bonus cap could be “the price” the UK has to pay for “continued access to the EU single market”.
The FCA and PRA declined to comment.
Additional reporting by Tim Burke