Regulation  

Chancellor backs down as ECJ rejects bonus challenge

George Osborne was forced to concede defeat over his objections to new European rules on bankers’ pay, after the European Court of Justice rejected the UK government’s challenge to rules being imposed to cap variable remuneration.

Advocate general Niilo Jääskinen considered that the European Union legislation limiting the ratio of bankers bonuses compared to their basic salary is valid and suggested that all six UK government pleas should be rejected.

The UK had brought an action asking the court to annul the provisions as it believed that measures fixing the ratio of variable to fixed remuneration contradicted rules relating to freedom of establishment and the freedom to provide services.

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The government had sought to argue the limits fall within social policy and therefore within the jurisdiction of member states.

It also argued that the provisions infringed on ‘proportionality and subsidiarity’, that the directive violated the principle of legal certainty, and that the measures requiring disclosure of remuneration infringed the right to privacy and data protection rules.

Mr Jääskinen dismissed all these arguments, stating that fixing the ratio of variable remuneration to basic salaries does not equate to a “cap on bankers bonuses” or fixing the level of pay, because there is no limit imposed on the basic salaries bonuses are pegged against.

“The 100 per cent ratio introduced by the legislation can attach to any sum of money that a bank is prepared to pay by way of fixed salary. The fact that this ratio can be increased to 200 per cent or fixed at a rate lower than 100 per cent by the member states underscores the absence of any “capping” effect,” he explained.

In response to the argument that the disclosure of remuneration would be contrary to EU data protection law, the advocate general observed that this disclosure is not mandatory, but rather a discretionary power conferred on member states.

Mr Jääskinen also found the objective of creating a uniform regulatory framework of risk management could not have been better achieved by national governments, as opposed to the EU.

Andrew Tyrie, chairman of the Treasury Committee and former chairman of the Parliamentary Commission on Banking Standards, called the EU bonus cap a “fundamentally flawed” approach.

“It has perverse and unintended consequences. The Parliamentary Commission on Banking Standards rejected it as a crude tool. It will encourage banks to increase fixed pay rather than embed incentive structures that improve standards.”

The chancellor also wrote to the governor of the Bank of England Mark Carney in his capacity as chair of the Financial Stability Board, setting out concerns around the implications of the bonus cap.

“It now looks clear that there are minimal prospects for success with our legal challenge, so we will no longer pursue it. But that should not stop us from pursuing our objective of ensuring a system of remuneration that encourages responsibility instead of undermining it.”

peter.walker@ft.com