PwC comments on new banking rules for identifying Material Risk Takers

Published at 17:02 PM on 13 December 2013

Commenting on the European Banking Authority's new rules for identifying Material Risk Takers, Jon Terry, partner at PwC said:

"Overall these are sensible changes to the rules. The EBA has given firms the chance to make the case for excluding people earning over €500,000 who genuinely aren't risk takers. This will be welcomed by the industry and should significantly reduce the number of additional staff deemed to be material risk takers.

"Under the original draft of the rules it looked as though the numbers of Code Staff would increase by at least four-fold. It now looks like this will be closer to doubling.  Although the changes will reduce the potential number of material risk takers, the biggest part of the problem will remain. Many of those who will be affected by the bonus cap earn more than €1m in any case. And it's not clear what appetite the PRA will have to make the case to the EBA that these high-earning individuals should be excluded.

"Overall we think it's likely these rules will continue to capture high earning traders. But there may be the opportunity to exclude people who don't put the firm's capital at risk, such as back-office staff, analysts, or portfolio managers in banks' asset management businesses.

"The compromises made by the EBA shouldn't distract from the fact that this still creates an unequal playing field for EU firms operating in Asia, North America, and elsewhere outside the EU. Recent EBA data on high earners suggests that even under these revised rules, the bonus cap is likely to cause fixed cost increases in excess of €1bn across the EU as banks adjust pay to remain competitive.

"If anything, the new rules will emphasise the extent to which the bonus cap is a UK problem. Recent data from the EBA showed that over three quarters of bank staff earning more than €1m are in the UK. And we'd estimate that around 90% of the additional staff caught will be based here. This is likely to make the PRA cautious in how it applies the opt-out provisions.

  "Firms should assume that most staff earning over €1m will be caught, and should not take it for granted that those earning between €500,000 and €1m can be argued out. Banks will need to ensure they have more robust processes for identifying material risk takers than has been the case in the past, otherwise they won't be able to take advantage of the opportunity to exclude certain staff earning more than €500,000.”




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