UK abandons EU bonus cap challenge

The UK government has decided to abandon its EU bonus challenge, with Chancellor of the Exchequer George Osborne saying the chances of a successful challenge are now “minimal” after the Advocate General’s recommendation on Thursday.

In a letter to Bank of England governor Mark Carney, Mr. Osborne wrote “It now looks clear there are minimal prospects for success with our legal challenge, so we will no longer pursue it.” Mr. Carnay is also chairman of the Financial Stability Board.

The UK government had been trying to overturn a decision embedded in a broader EU legislation regarding banks’ capital requirements that limits bonuses to 100% of an employee’s fixed annual salary, or 200% if shareholders voted in favor.

In a complaint against EU institutions, the UK said the bonus cap rules went beyond what the EU treaties permitted, and would not help make the financial system any safer.

The European Court of Justice wrote on Thursday “In his Opinion today, the Advocate Genera Niilo Jääskinen suggests that all the UK’s please should be rejected and that the Court of Justice dismiss the action.”

European Court of Justice

The Advocate General’s opinion is not binding and the European Court of Justice can ignore it, but it rarely does.

The European lawmakers who introduced the law said high bonus payouts linked to short-term profit encouraged people to take excessive risks, which had contributed to the financial crisis.

London, by far Europe’s most important financial hub, was alarmed by the law. Experts say it will result in banks moving their operation elsewhere, outside the European Union.

Analysts say all the law will do is to encourage banks to raise fixed pay, making it much harder later on to reduce costs if they hit on hard times. The regulation definitely places London at a disadvantage in the world stage, they add.

Europe’s banking watchdog, the European Banking Authority, said several banks were making special payments to executives and getting round the bonus cap rule.

Mr. Osborne said:

“I’m not going to spend taxpayers’ money on a legal challenge now unlikely to succeed. The fact remains these are badly designed rules that are pushing up bankers’ pay not reducing it. These rules may be legal but they are entirely self-defeating, so we need to find another way to end rewards for failure in our banks.”

The British Banking Association said in a statement:

“We believe that shareholders should be given powers to determine staff pay – not politicians. That’s why banks consult with investors before setting staff pay and shareholders also have the power to vote on the pay of senior bankers.”

“We believe this law runs counter to recent reforms and will make the system less robust by incentivising firms to increase fixed pay.  It also puts European banks at a disadvantage when competing with firms in other parts of the world.”