By Huw Jones
LONDON (Reuters) - Top bankers in London and elsewhere in the European Union find out in coming days if their pay contracts may be torn up to stop their attempts at softening the bloc's cap on bonuses.
The European Banking Authority (EBA), an EU watchdog, is due to publish a report on whether so-called monthly or quarterly "allowances" some banks now give top staff to boost their pay, are simply a ploy to blunt the cap's impact.
Bonuses are capped at no more than fixed salary, or twice that amount with shareholder approval, starting with payouts for their 2014 performance to be paid out next year.
The cap is one of the EU's main responses to the 2007-09 financial crisis which forced taxpayers to bail out lenders. The aim is to quell public anger over big bonuses and reduce the incentive to take huge risks in a bid to win a bigger payout.
"Emotions are running high on this issue and I am expecting them to say that allowances are caught by the remuneration provision in spirit," said Jacqui Hatfield, a financial services partner at ReedSmith law firm.
Banks, including HSBC, Barclays and Citi have introduced allowances. Most bankers affected by the cap are in London where regulators have given such allowances the nod as the British government challenges the cap in the EU's top court, with the outcome due around early 2015.
Lenders have been asked to submit templates to the EBA of how their pay is structured and could face a dilemma.
"If you are an employer you have contractual guarantees between you and the employee. Although a regulatory body might come in and say you can't do that anymore, you are still left with that contractual commitment," said Jules Quinn, a lawyer at Jones Day.
"INVENTED REVENUE"
EBA was asked by the bloc's financial services chief Michel Barnier, to report on allowances, which he has dubbed "a new category of invented revenue".
John Ahern, also at Jones Day, said EBA's report may create a difficult situation for banks as they face potentially having to claw back some of the allowances already paid.
"I expect that there is going to be a wholesale review of contractual commitments. We are going to see a lot of contractual amendments going forward," Ahern said.
The EBA report could include recommendations making it clear what sort of allowances, if any, are acceptable.
The level of potential disruption to pay contracts will depend on whether changes by EBA are backdated or phased in.
"I think if they say no to allowances it will apply to payments made in the next financial year. I don't think it will be retrospective," ReedSmith's Hatfield said.
The report will feed into a broader review by EBA on all EU banker remuneration guidelines. That review will be put out to public consultation around year end and take effect in the first half of 2015.
(Reporting by Huw Jones; Editing by Emelia Sithole-Matarise)