LONDON (Reuters) - British financial regulators have said they won't apply the European Union's cap on banker bonuses to smaller lenders because they pose fewer risks to the financial system.
Under EU rules, all bonuses should be no bigger than fixed pay but can rise to twice that amount with shareholder approval. London has the largest number of bankers hit by the cap, which extends to asset managers in a banking group.
The reform was aimed at quelling public anger over large bonuses at a time of austerity in many EU states following the financial crisis.
National regulators must explain if they diverge from the rules as set out by the bloc's European Banking Authority (EBA).
The Bank of England's Prudential Regulation Authority, and the Financial Conduct Authority said in a joint statement they have told the EBA that they disagree with a blanket application of the bonus cap rule on all firms.
The PRA and FCA said they interpreted EU law as allowing for flexibility in relation to the size and complexity of a lender.
"The PRA attaches a great deal of importance to the principle of applying policies in a proportionate manner consistent with the legal provisions," Bank of England Deputy Governor and PRA Chief Executive Andrew Bailey said in a statement.
More flexibility in applying financial regulation from Brussels was at the core of Britain's "new settlement" negotiated 10 days ago by Prime Minister David Cameron before a British vote in June on whether to stay in the EU.
London's banking sector is among the industries with most to lose if Britain leaves the EU, according to many economists who say an exit could hamper its ability to operate in the single European market and lead to thousands of jobs being shifted to the euro zone.
"The PRA and FDA's announcement will come as a big relief to smaller banks and asset managers in the UK who had been concerned that the cap would apply to them from 2017. It remains to be seen whether any other EU regulators will take a similar approach," said Alexandra Bedims, an employment lawyer at Linkages.
Britain was outvoted on the EU law capping bonuses, saying it would prompt banks to raise fixed pay and make them less nimble in cutting costs in a market downturn.
The EBA noted on Monday an announcement it made last year that the cap should be applied without exemptions.
The bloc's executive European Commission has powers to take a member state to court for not complying with EU rules. It is already assessing an EBA recommendation to give smaller lenders more flexibility on some aspects of banker pay rules.
"At this stage it is too early to talk about whether or not to launch infringement proceedings. The Commission needs to first carefully look into and assess the detailed information provided by EBA," a Commission spokeswoman said.
The UK regulators said that all large and systemically important banks, which would include RBS, Lloyds, HSBC and Barclays, must continue to apply the bonus cap.
Editing by Adrian Croft and Keith Weir