TOUGH NEW rules restricting bankers bonuses in Europe were approved by European Union lawmakers in Strasbourg yesterday.

The measures, introduced as part of a package of amendments to a directive that sets out how much capital banks must hold to support their operations, were agreed between EU member states and European parliamentarians last week.

The legislation calls for national regulators to put rules in place by January and apply them to bonuses for 2010 performance.

The new bonus rules are broadly in line with global recommendations endorsed by the Group of 20 leading nations, but the detailed conditions are significantly tighter in some areas – particularly on deferrals and limits on the use of cash.

On paper, the EU will now have one of the strictest regimes internationally. In practice, however, much may depend on how strictly national regulators across the 27-country bloc implement the rules.

The rules require 40-60 per cent of bonuses to be deferred for three to five years, and half of any upfront bonus to be paid in shares or in other securities linked to the bank’s performance. As a result, bankers will only be able to receive between 20-30 per cent of any bonus in upfront cash – the toughest restriction worldwide to date in this area.

National regulators, meanwhile, will have the power to impose financial penalties on banks that flout these rules, such as requiring them to hold more regulatory capital.

Many banks have already cut their use of cash and increased the use of deferred bonuses in the wake of the financial crisis, but the rules are designed to prevent a slip back to cash bonuses as the economy improves and recruiting pressures increase. – (Copyright The Financial Times Limited 2010)