The European Banking Authority has released a detailed consultation on the matter and declared that misconduct and mis-selling by staff in financial institutions have been driven by poor renumeration polices and practices.
It acknowledged that staff pay is an important means for financial institutions to attract and hold on to the best employees, but believes further regulation is necessary.
Going forward, the bonus cap will limit variable pay to the same size as a bankers salary. However, this figure can be double a salary if shareholders agree.
A statement from the European Banking Authority read: The guidelines ensure that institutions calculate correctly and consistently the so called bonus cap’ by setting out specific criteria for mapping all remuneration components into either fixed or variable pay and detailing how specific remuneration elements such as allowances, sign-on bonuses, retention bonuses and severance pay are to be recognised over time.”
Prior to this ruling, the British authorities had decided against a bonus cap siding with the declaration from financial institutions that it drives up salaries and undermines financial stability.
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The new legislation, which comes into force in January 2017, will be applied to those deemed as able to undermine a banks financial stability namely senior executives and bankers taking major risk.
Clarifying where it stands on smaller banks, the European Banking Authority said: In particular, it is the EBA’s opinion that the disapplication of these requirements should be possible for small and non-complex institutions and for staff that receives only a small amount of variable remuneration.
However, the opinion clarifies that the application of the so called bonus cap’ should not be subject to any exemption.