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Gov’t launches legal challenge over EU banking pay rules

The government has lodged a legal challenge with the European Court of Justice on new EU rules on bankers’ pay.

These new rules are contained within the European Union’s latest legislation governing the amount and types of capital that banks must hold, the Capital Requirements Directive IV.

According to the UK government, the provision for a ‘bonus cap’ in the directive has led to a substantial reduction in upfront cash bonuses which it argues can encourage short-term risk taking.

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It cited figures from the Centre for Economic and Business Research, which estimated that City bonuses in 2012-2013 were more than 60 per cent less than in 2011-2012 at £1.6bn – and more than 85 per cent less than the £11.5bn estimated to have been paid in 2007-2008.

The government said in a statement that rather than imposing prescriptive rules, the EU’s latest legislation in this area should be about building on work in the UK to make banks safer and their pay policies more acceptable.

It added that the bonus cap was introduced without any assessment of its impact or supporting evidence, and that it will undermine the significant progress that has been made to implement pay practices that support financial stability.

A Treasury spokesperson said the legal challenge will argue the legislation is not fit for purpose and will lead to an increase in fixed salaries.

A Treasury spokesperson said: “Britain has been at the forefront of global reforms to make banking more responsible, including big reductions in upfront cash bonuses and linking rewards to long-term success.

“These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers’ fixed pay up rather than down, which will make banks themselves riskier rather than safer.

“In other words, as the chancellor has said, they may undermine responsibility in the banking system rather than promote it.

“Regulation of pay in this manner goes beyond what is permitted in the EU Treaty. That is why we are challenging these rules in the European Court, to ensure the legislation respects the EU Treaty and actually achieves what it is meant to.”