Bonus caps agreed by banking watchdogs

European Union bank watchdogs fleshed out yesterday what amount to the world's toughest and most far-reaching curbs on bonuses, prompting a warning that financial firms are now more likely to set up shop elsewhere.

Bonuses will be capped on the basis of earnings and liable for repayment if shown to have been awarded for unduly risky actions, according to the guidelines from the Committee of European Banking Regulators (CEBS) which will become mandatory from January following consultations.

The rules aim to align pay with risks, and banks will be forced to rewrite staff contracts, a costly exercise which could see base salaries being bumped up to skirt the curbs.

After governments across the EU had to bail out banks, politicians have called for curbs on payouts in the sector and the guidelines are tougher on firms receiving state aid.

The 84-page set of rules implements a new EU law that curbs excessive bankers' pay from next year and go beyond global principles on remuneration agreed by the world's top 20 leading developed and developing economies and individual EU states like Britain.

"The CEBS guidance makes the European regulation of banking pay among the most stringent and it confirms the extension of the provisions to the world-wide operations of European banks," said Jon Terry, a partner at PwC.

"Unfortunately this deviation from global trends in banking remuneration could make it more likely that banks move operations, or at least expand, outside of the European Union."

Parts of the guidelines are less restrictive than some in the industry had feared as CEBS ducked one major tool.

Banks will have to fix an "appropriately balanced" maximum ratio of bonuses to fixed salaries for top staff, stopping short of imposing a set ratio across the board.

"In all cases, the separation between fixed and variable components must be absolute. There must be no leakage between these two components," the draft guidelines said.