The News Isn't Getting Any Better About EU Bonuses

The European Union is seen implementing strict rules on bonuses as part of regulatory measures designed to rein in risk-taking.

The strictest measures seem to be winning the most favor among European Union officials meeting this week in London to implement rules this summer. The Committee of European Banking Supervisors is leaning toward requiring banks to adhere to a strict ratio that would limit bonuses to a multiple of annual salary. The cap would depend on how effectively the bank links pay to performance and risk.

The rules would apply to worldwide operations of EU-based banks and the European subsidiaries of any non-EU firms. Though the regulation draft specifies that any immediate cash payment must be capped at 20 percent of the total bonus, Britain's FSA has argued that bankers should be able to receive at least half of their bonuses in cash.

All of this isn't going over too well with Europe's financial professionals. Richard Balarkas, chief executive officer of brokerage Instinet Europe, says the strict bonus rules might drive lenders from EU countries.

"If I'm a highly rated analyst, I don't understand why I'd sit in an investment bank, in a highly regulated environment where I am now personally liable for all kinds of things, in a tax regime where I give the government half what I earn," Balarkas said. "Some of the smarter people are looking for easier and better ways to make a living."

Still, there's some good news for asset managers: Regulators may be able to modify the rules for some institutions. The FSA, for instance, has said it will modify the rules for hedge funds, allowing managers' returns to align with investor profit.

Regulators plan to issue draft regulations within the next few days, to be followed by a month's consultation with the industry.