FSA lets City slip under the bar as EU caps bonuses

Most of the City will escape EU rules to curb bankers' bonuses under a code issued today by the Financial Services Authority.

The watchdog said all but the biggest banks will be exempt from guidelines laid out last week by the Committee of European Banking Supervisors.

Lower-tier firms including smaller banks, hedge funds and asset managers will not have to apply a tighter cap on the proportion of bonuses paid in cash, as put forward by the CEBS, the FSA said.

The move is likely to anger politicians and union leaders who have called for a tougher approach to bonuses.

The CEBS, which is made up of representatives from banking supervisory authorities and central banks across the EU, said its guidelines promoted "sound and effective risk management".

Under its rules bankers will be allowed to receive only 20% to 30% of their bonus up-front in cash, with the rest deferred or held in shares for at least three years.

But the EU committee said compliance levels could vary depending on the level of risk-taking activity. As a result, the FSA has chosen not to apply the cash bonus-cap to most of the 2,700 British firms affected by its own renumeration code.

Major banks such as Barclays, HSBC and Lloyds will not be able to offer guaranteed bonuses beyond one year and the FSA will have the power to take back payments to senior managers whose risks are later found to have caused losses.

The rules, which will come into force on January 1, are the latest measures designed to repair damage caused by banks in the financial crisis. Last week, the Treasury published final draft legislation for its new bank levy, which will raise £2.6 billion by 2012 through taxing the balance sheets of Britain's largest banks.