(FT.com) -- European Union lawmakers and member states backed the toughest restrictions on bankers bonuses seen so far on Wednesday, sowing confusion across an already jittery financial services sector.
Under legislation expected to pass the European parliament next week, between 40 and 60 per cent of bonuses would have to be deferred for three to five years and half the upfront bonus would have to be paid in shares or in other securities linked to the bank's performance.
As a result, the cash portion would be limited to between 20 per cent and 30 per cent, far tighter than the limits currently used by most members of the 27-nation bloc.
The agreement caught bankers and regulators by surprise and left them scrambling to figure out how the rules would work. The UK Financial Services Authority, which already has a remuneration code in place, said it was studying how the proposed directive would affect its practices.
Treasury officials in the UK said the proposal were in line with last weekend's G20 communique and Basel agreements but that it was important that they were implemented "in a co-ordinated manner in all major financial centres".
"These requirements will be implemented across Europe from next year after further detailed consultation," said one official.
National regulators will have some discretion in applying the rules to their own countries but the overall percentages appear to be fixed. Regulators would be able to impose financial or non-financial penalties on groups with risky remuneration policies.
The legislation would also force banks to link bonuses more closely to salaries -- with the aim of reducing the importance of such payments in the financial sector.
Any banks bailed out by taxpayers must rebuild their capital first and repay those funds before focusing on employee pay.
On Wednesday, lawmakers and EU officials welcomed the agreement and said it should help to reduce the "bonus culture" in the banking sector.
"This EU-wide law will?.?.?.?end incentives for excessive risk-taking," said Arlene McCarthy, the MEP steering the legislation through the European parliament.
European Union internal market commissioner Michel Barnier described the new rules as "a step in the right direction".
Senior bankers contacted were reluctant to comment but said they believed the instruments would be difficult to design and warned that tough pay rules could drive business to Asia and the US, which have shunned strict limits on bonuses.
Angela Knight, of the British Bankers' Association, said politicians should realise most banks have already changed their pay practices and keep in mind that "this is an international and mobile business".
