At an ECOFIN Council meeting held on 5 March 2013, finance ministers broadly endorsed the proposed bonus cap provisions that form part of the political agreement on reform of the EU’s rules on capital requirements for credit institutions, the Capital Requirements Directive IV (CRD IV).
The directive was hammered out in February by the European Parliament and the Irish Presidency, which negotiated on behalf of the Council.
Under the CRD IV package, bonuses will be capped at a ratio of 1:1 fixed to variable remuneration, i.e. bonuses are equal to fixed salary. This ratio can be raised to a maximum of 1:2. However, this will require the support of at least 66% of a quorum of shareholders who control 50% of the shares. Where a quorum cannot be reached, the measure can approved where it is supported by 75% of shareholders present.
For the purpose of applying this ratio, variable remuneration may include long-term deferred instruments which can be clawed back. The European Banking Authority (EBA) is to prepare guidelines on applying the instruments.
Such measures are to apply to all European Banks, including those operating outside the European Economic Area and European Free Trade Area, as well as foreign banks operating within the EU. The United Kingdom, which hosts the EU’s largest financial centre in the City of London, has expressed serious concerns that these measures would affect the competiveness of European Banks and lead bankers to relocate outside of the EU to other financial centres such as Hong Kong or New York.
The vote on the legislation in the European Parliament is currently expected to take place at the 15-18 April plenary session. The measures will then have to be approved and adopted by the EU Council. We understand that Member States will then be required to implement the rules by 1 January 2014. It is intended that the European Commission will carry out an impact assessment of these rules in conjunction with the European Banking Authority within two years of implementation.