UK challenges EU over bonus cap for bankers

The UK is mounting a legal challenge to new rules that limit the bonuses bankers can be awarded.

The UK government is due to present a legal challenge today (September 8th) to new EU legislation that limits the bonuses that can be paid to bankers.

Under the new rules, bonuses awarded from this year onwards will be limited to 100 per cent of the employee’s salary. With shareholder approval, that figure can rise to 200 per cent. Not only will it affect all 28 EU member states, but it will even apply to banks based in those countries when they are operating abroad.

It is easy to see how the idea has come about. After all, the EU argues that inflated bonuses and a culture that could even be said to reward failure, create disincentives to high performance and encourage the kind of high-stakes gambling that effectively caused the financial crisis.

But the UK, which holds the biggest financial centre in the EU, believes that the idea could prove disastrous for the banking sector. The government’s biggest concern is that banks will compensate for lower bonuses with higher salaries, which are much harder to cut in times of difficulty.

However, it’s fair to say the Treasury is also worrying that the rules will make London appear less appealing at the side of less regulated financial centres like Hong Kong and New York.

Government lawyers are fighting the bonus cap on six key grounds, including that it is unfit for purpose and brought in without enough impact assessment; it is being rushed without supporting legislation in place, not least details on whom the cap will apply to; and that it does not protect personal data effectively.

The challenge also states that the laws are invalid because they affect “the rights and interests of employed persons”, which is excluded from the legal base for regulation. Moreover, the UK insists the rules should not apply to anyone outside the European Economic Area and gives illegal powers to the European Banking Authority on a policy matter instead of the technical points it normally focuses on.

Decisions can take months and it will be the end of the year at least before the European Court of Justice clarifies its position. But EU authorities still clearly believe the cap is both valid and vital to ensure financial stability.

“If you run to the court because you lost the democratic argument, it’s a sign of the weakness of your argument,” Sven Giegold of the European Parliament’s Green group told Bloomberg.