ROYAL Bank of Scotland's hopes of paying bonuses twice the size of salaries have been scuppered by the Government.
Under new European rules, the part-nationalised bank requires the approval of shareholders to award variable remuneration up to 200% of fixed pay.
However, RBS has been told by UKFI, which manages the Treasury stake, that it will not support a resolution proposing a 2:1 ratio. It means the proposal will no longer be put to shareholders at its AGM in June.
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With other banks currently seeking approval for the 2:1 ratio, RBS, which is 81% owned by the taxpayer, warned it now faces a "commercial and prudential risk" as it tries to operate within a 1:1 fixed to variable pay ratio.
It said: "The board believes the best commercial solution for RBS is to have the flexibility on variable to fixed pay ratios that is now emerging as the sector norm."
George Osborne said he was pleased by the move but made clear that while the new team at RBS had done a huge amount to repair the damage at the Edinburgh-based institution, there was "still a long way to go".
"So therefore, we made it clear that in the circumstances it was not right to increase the bonus cap. I'm glad RBS agreed with that. I'm also glad total pay at RBS is coming down," said the Chancellor.
A Treasury spokesman said there could be no rise in the RBS bonus cap because the bank has not yet completed its restructuring and remains majority public-owned. The Treasury will not oppose a 2:1 bonus ratio at Lloyds Banking Group, in which it still has a 25% stake, because the bank has largely completed its restructuring. The spokesman added: "We have made clear there will be no rise in the bonus cap for an RBS still in recovery, but a bonus cap at Lloyds that reflects the progress it has made in getting money back for taxpayers."
The EU bonus rules, which came into force on January 1, limit annual payouts for 2014 onwards to 100% of annual salary, or a maximum of 200% with shareholder approval. The Government believes this will not support stronger and safer banks, and has launched a challenge to the rules in the European Court.
Labour has accused the Coalition of being in a "terrible muddle" over the issue. Cathy Jamieson, the Shadow Treasury Minister, called on it to drop its opposition to the EU bonus cap.
Barclays yesterday won the support of shareholders for payments of up to 200% of salary.
RBS, said chief executive Ross McEwan will receive a salary of £1 million this year, as well as the potential for up to three times that amount through the company's long-term incentive plan.
Meanwhile, three of Britain's biggest investors are expected to file lawsuits against RBS next week saying they were misled over its 2008 rights issue and seeking to claw back more than £1 billion.
Legal & General, which was the biggest investor in RBS at the time of the rights issue, is expected to file a claim.
Standard Life and M&G Investment Management, which is owned by Prudential, are also set to file claims. Those firms were both among the ten biggest investors in RBS. The claims are expected to be filed on Wednesday.