By Huw Jones
LONDON (Reuters) - Britain could face legal action if it fails to implement the European Union's new rules on capping banker bonuses as set out in new draft guidelines published on Wednesday.
The European Banking Authority (EBA), the bloc's watchdog, published revisions on Wednesday to its existing guidelines which were overtaken by the EU law on capping banker bonuses.
That cap limits bonuses to no more than twice fixed salary.
Most of the bankers hit by the cap are based in London and the EBA said in October that "allowances" paid by 39 banks in six countries to boost fixed pay, and hence soften the bonus cap, breach EU rules.
"The paper is very black and white, it does not make allowances for the 50 shades of grey necessary for a firm's remuneration policy to work in practice," said Anna McCaffrey, senior associate at Taylor Wessing law firm.
The revised 119-page guidelines, put out to consultation for three months, will come into force by the end of this year.
They require Britain and other EU states to apply the rules bonuses paid from early 2016, or explain publicly why not.
Under the rules, if the watchdog felt an explanation not to comply was without merit, it could "name and shame" the national regulator. The EU could even take the member state to the bloc's top court, which has powers to levy fines, though some lawyers said such a drastic step was highly unlikely.
The proposed changes to the EU guidelines propose no material tweaks to EBA's non-binding opinion on allowances from last October.
The watchdog does, however, want to exempt staff at smaller banks, found mainly in continental Europe, from having to defer a portion of their bonus over several years.
"On this point, the EBA is of the view that specific exemptions could be introduced for certain institutions that do not rely extensively on variable remuneration and ... for identified staff that receive only a low amount of variable remuneration," the watchdog said in a statement.
It will suggest that the bloc's executive European Commission proposes legislative changes to the bank bonus law to introduce the exemptions.
This follows a legal opinion of the EU bonus law that requirement to defer part of a bonus must to apply to all institutions, potentially drawing in far more staff under the net, such as asset managers at units of banks.
Britain opposed the bonus cap, saying it would lead to banks bumping up fixed pay, and UK regulators have said it was too late to stop allowances affecting the current bonus season.
Britain's finance ministry signalled there could be wriggle room for UK regulators in applying the final EU rules.
It will be up to UK regulators "to decide how and to what extent the EBA's final guidelines are incorporated into Britain's existing rules on bankers' pay, which are already the toughest of any major financial centre," a spokesman said.
Bankers say the revised EBA guidelines will force banks in London to rewrite many contracts for allowances.