An adviser to the European Court of Justice has rejected the UK’s challenge to the EU plan to cap bankers’ bonuses.
The cap restricts bonuses to 100% of banker’s pay or 200% with shareholder approval.
Advocate General Niilo Jääskinen gave an opinion that the EU legislation limiting the ratio was valid.
The cap on the ratio is designed to reduce incentives for bankers to take excessive risks but critics say it will push up basic pay and banks’ costs.
The UK government challenged the legislation asking the Court of Justice in Luxembourg to consider six arguments challenging both the scope and the legal basis for the new rules.
Advocate General Jääskinen rejected all the UK government’s legal and technical arguments against the EU legislation.
He said: “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 that the bonuses are pegged against.”
Analysis: Theo Leggett, Business Correspondent
The advocate general’s opinion may not be legally binding, but it still amounts to a slap in the face for the UK government.
The new rules were introduced to prevent senior bankers from taking excessive risks in the hope of gaining big short term rewards. EU policymakers think this kind of behaviour was one of the factors which led to the financial crisis.
But the UK government thinks there’s no evidence to suggest a bonus cap will make the banking system any safer. In fact, it believes it could make matters more precarious – because large fixed salaries aren’t as easy to cut during a downturn.
The government put forward six legal arguments to support its case; the advocate general thinks none of them hold water.
However, he does make one rather interesting point. He says that because the level of bonus is linked to annual salary, and there is no cap on salaries, there is not really a bonus cap at all.
That is a point the Treasury agrees with wholeheartedly – and which it claims undermines the whole rationale of the new rules.
A spokesman for the British Bankers’ Association said: “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.”
The Luxembourg court will consider Advocate General Jääskinen’s reasoning in reaching its verdict. Historically, around three quarters of the opinions of Advocate Generals have been adopted by the Court.
A final ruling is not expected until next year.
UK and EU banking regulators have also clashed over attempts by British banks to sidestep the bonus cap by awarding banking executives “allowances”, paid alongside salaries to bolster their pay.
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