Top EU lawyer dismisses UK’s challenge to bank bonus cap

Advocate general recommends bankers’ payouts should be pegged to salaries

The advocate general recommends bankers’ payouts should be pegged to salaries (Getty)

Chancellor George Osborne has been dealt a blow by a senior EU lawyer who said the UK’s challenge to Europe’s cap on bankers’ bonuses should be thrown out.

Advocate general for the European Court of Justice Niilo Jääskinen said it was “valid” to limit bonuses to 100 per cent of salary – or 200 per cent if enough shareholders approve.

The Government’s main case is that capping pay-outs to no more than 200 per cent of salary undermines efforts to improve financial stability because it will result in higher basic salaries for bankers that cannot be clawed back if they damage their employers. The Treasury, the Bank of England the industry have all made similar arguments.

But the advocate general said: “Given that the variable component of remuneration impacts directly on the risk profile of financial institutions, it can affect the stability of financial institutions who can operate freely across the EU, and in consequence that of the financial markets of the EU.”

He also dismissed ministers’ arguments that the EU was over-reaching itself and interfering in institutions ability to set pay, and even objected to the use of the term “cap”.

While his decision is not binding on the European Court of Justice, which is expected to rule on the matter next year, it rarely goes against the recommendations of advocates general.

“The determination of the level of pay is unquestionably a matter for the member states,” he said. “However, 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.

“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 said the cap would harmonise rules across the EU so it was justified in imposing it across the bloc.

The Treasury said it was “considering options” in response to the opinion. But it said Mr Jääskinen’s argument that the cap left banks free to raise basic salaries was “precisely the reason why we, the Prudential Regulation Authority and the Bank of England have been opposed to this policy”.

The British Bankers’ Association agreed, saying: “There have already been sweeping changes made to the way bank staff are paid since the financial crisis. Bonuses are smaller and staff are rewarded for making decisions that benefit the businesses, shareholders and the broader economy.

“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.”

One banker described the opinion as “not unexpected” but added: “This is just a stupid law. There are not many times you get the industry, the Treasury and the regulators all in the same place.”

David Hillman, spokesperson for the Robin Hood Tax campaign, which calls for a tax on banks’ transactions, disagreed, saying: “George Osborne has got his priorities in a twist. He’s wasting taxpayers’ money on futile attempts to defend his friends in the City, when he should be bringing the sector back under control.”

The final ruling is not expected until next year.