George Osborne opposes EU's planned cap on bankers' bonuses

Brussels plans to limits bonuses to 100 per cent of salary - or twice that with shareholder approval

George Osborne’s attempt to head off the EU’s planned cap on bankers’ bonuses appears doomed, as uneasy banks based in the City of London considered launching a legal challenge against the plans.

The Chancellor told his European counterparts that he could not support “the proposal currently on the table” in Brussels, which limits bonuses to 100 per cent of salary or twice that with shareholder approval.

But while Germany and the Dutch have some sympathy with his position, he was warned there was a “broad majority” among the other 26 members for the cap. 

Stephen Mavroghenis, a partner at law firm Shearman & Sterling, said he believed there would be ample scope for banks to legally challenge the plan before the European Court of Justice. “Under the Lisbon Treaty pay is excluded from the competence of the EU. It cannot set minimum wages, for example, that is for national authorities,” he said.

“To my mind neither the European Commission nor the Parliament has answered that, although ultimately the devil will be in the detail of the proposals.” Mr Mavroghenis has produced a legal opinion to this effect, but was unable to say which bank it was for.

It is understood that none of the big British banks have any appetite for such a challenge after a bruising results season that saw them facing sharp criticism from the public and Westminster of their pay and bonus practices.

However, some US banks are thought to be considering such a move. “It’s fairly common there for issues like this to be raised and tested before the courts and there was a move to do it on a previous piece of EU legislation,” said one City source.

Senior banking executives and British officials argue that the cap proposals will have a “perverse” outcome, resulting in sharp increases to bankers’ basic pay and leaving banks with less flexibility to cut back in hard times. They also contend that the cap plan will mean there is less scope to “claw back” bonuses from people who later prove to be involved in scandals or whose actions result in significant losses for their employers.

The proposals can still be fine tuned, but the talks paved the way for a formal vote to approve them by ministers next month. Conservatives fear that in their current form they will damage the City, and London major Boris Johnson has described them as “moronic”.

Meanwhile, opposition figures have claimed that the the rebuff to the Chancellor demonstrated Britain’s weakness in Europe under the Conservatives. David Cameron’s official spokesman said that Britain would play an “active” role over the coming weeks in discussions on how the new rules will be implemented.

“Some progress was made. The process of discussion is going to continue over the coming weeks on how rules are implemented and we will be active in those discussions,” he said.

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