The Bank of England is ignoring EU rules on bonus caps for small firms

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Mark Carney gold

REUTERS/Blair Gable

Mark Carney, governor of the Bank of England.

Employees at small UK financial firms can breathe a sigh of relief.

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The Bank of England told the European Banking Authority it wouldn't enforce EU bonus limits on banks, hedge funds and brokerages with assets of under £15 billion.

This means more than 1,000 UK firms can exceed the two-to-one bonus to salary cap imposed on big banks to limit risk taking.

The current EBA cap, set out in the EU's Capital Requirements Directive (CRD), limits companies from paying bonuses of more than 100% of a base salary. If the bonus is approved by shareholders, the limit cannot be more than 200%.

The bonus cap was introduced by the EU to curb reckless banking practices which many believe resulted in the financial crash of 2008. But the BOE has consistently criticised and ignored the cap. Defending its decision, it said on Monday that it "creates the wrong incentives" which only leads to firms raising salaries, and that it believes "variable remuneration should constitute a substantial portion of overall." It added that limiting bonuses makes it more difficult for firms to cut costs when times are tough, which makes the cap counter-productive as a regulatory move.

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Nevertheless, the BOE still imposes the cap on an estimated 30 financial institutions, a move it sees as proportional as their size makes them a financial risk.

Having already decided in December that such member states were not allowed to take a proportional stance, the EBA may still pursue infringement proceedings by taking its complaints to the European Commission. However, according to The Guardian, a spokesman for the Commission said it was still "too early" to discuss such matters and it would have to wait for the EBA to act.

Graeme Standen, an executive incentives expert, told Out-law.com that BOE chairman Mark Carney's dual role as the chairman of the Financial Stability Board, a group of G20 regulators, would "increase pressure on the EU to reconsider its bonus cap during the 2016 review of the CRD."

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