By Huw Jones and John O'Donnell
LONDON/BRUSSELS (Reuters) - The European Commission has asked the Bank of England to explain how new allowances in British bankers' pay comply with an EU bonus cap, an official at the bloc's executive said, a new flashpoint of friction over the reach of financial control.
Under EU rules, from 2015 bonuses cannot be more than fixed salary, or double this amount with shareholder approval, and most of the bankers affected are based in London.
Banks including Barclays, HSBC and Goldman Sachs are expected to raise the non-bonus part of remuneration with, for example, monthly or quarterly "allowances".
The European Commission official said the executive has asked the European Banking Authority (EBA), an EU watchdog, to seek an explanation on such extra payments from the BoE's Prudential Regulation Authority (PRA).
"A report is expected next week," the official said.
The EU executive has powers to fine countries that fail to apply its rules properly.
The PRA said bank remuneration policy is frequently discussed but it would not comment on any ongoing discussions.
Britain is challenging the bonus cap in the EU's top court, arguing it goes beyond EU powers and will push up fixed pay, making banks riskier as they will not be able to trim costs quickly in rocky markets.
The EBA could not be reached immediately for comment.
It will publish guidelines this year with a more precise definition of what constitutes variable and fixed pay, the Commission official said.
"We will encourage the EBA to take a strict approach in this exercise," the official said.
A spokeswoman for EU financial services chief Michel Barnier, who is responsible for enforcing EU financial services rules, said the Commission has no detail yet from banks about allowances so it was hard to reach a firm position on them.
"We will monitor very closely with EBA that rules are correctly implemented and applied," she said.
Banks say they are not trying to circumvent the cap as they consider allowances to be part of fixed pay while offering the lender more flexibility to cut costs if markets turn sour.
A person familiar with the PRA talks said the EU watchdog is meeting bank regulators from all member states individually to see how they are complying with the new rules. Banks are mulling similar allowances for staff elsewhere in the EU.
The remuneration plans for the coming year presented by banks in Britain will affect bonus payouts next year and the person said that the PRA views them as complying with EU rules.
The PRA considers allowances part of fixed pay under the EU rules and hence they affect the bonus calculation, the person said. The allowances relate to a banker's job description and cannot be changed over the coming year, the person said.
Barnier's spokeswoman said under the EU rules pay is either fixed or variable with "no third form" permissible.
"One would expect banks to interpret this in a common sense and straightforward way without trying to circumvent it by including in fixed remuneration elements which actually vary in level," the spokeswoman said.
Martin Wheatley, chief executive of the UK Financial Conduct Authority, which is also scrutinizing bank pay plans, said on Tuesday the cap was creating "perverse" effects by bumping up basic salaries.
(Additional reporting by Steve Slater in London; Editing by Louise Ireland)