GUEST COMMENT: Why the EU's new bonus rules hopefully won't be a big deal
The European Union's new bonus rules have been approved today.
At first glance, they are the most punitive in the world. From January 11, 40 to 60% of bonuses will need to be deferred for three to five years, and only half of the remaining bonus will be paid in cash.
These rules appear to apply to all banks, and to certain investment firms (including hedge funds). They also appear to apply to all risk takers, not just to those in high earning roles. This is in contrast to the FSA's current Code of Practice, which applies only to the UK's 26 largest banks and building societies, and has been operating so that only 40% of bonuses above 500k and 60% above 1m must be deferred.
If the EU rules come into force precisely as they've been worded, they will therefore herald another major reform of compensation in the City.
However, we are hopeful that their impact will be lessened in their implementation. Each EU country has to ratify the new rules and put them into effect. In the UK, this will happen through the FSA, which is due to issue a revised Code of Practice for consultation at the end of this month.
There is no question in my mind that the current EU rules provide room for FSA interpretation. For example, there is a proportionality test allowing the rules to be enforced with differing degrees of rigour depending upon the size and complexity of the organisation. This is effectively EU coding giving individual country regulators leeway in how the new rules are applied.
The FSA has had a history of setting principles and applying them on a case by case basis. I would expect the same to apply to these new EU compensation requirements. It is unlikely, therefore, that hedge funds will need to apply the same rules (for example, to the amount of deferrals) as major banks. Nor will agency brokers, interdealer brokers, or boutiques.
We will only know the true outcome when the revised Code of Practice is issued in the coming weeks. Until then, we're hopeful the outcome won't be as punitive as it seems.
