British government failed in its attempt to block the European Union’s new limits on bank bonuses on Thursday (20 November), and instead chose to withdraw its legal challenge following a statement by an adviser to the Luxembourg-based European Court of Justice (ECJ), whose opinions are non-binding but are generally followed at least in part by the bloc’s top court, which indicated that the UK’s challenge was unlikely to succeed. The EU law is designed to curb the kind of risk-taking that significantly contributed to the financial crisis in 2007-2009 by limiting bonuses awarded from next year to a sum no more than a banker’s fixed pay, or twice that level with shareholder approval.
But according to an ECJ statement, Advocate General Niilo Jääskinen had suggested the Court of Justice reject Britain’s action because “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.” Jääskinen furthermore explained that bonuses were a matter of the internal market as they relate to risk taking at banks that could affect financial stability in Europe.
London, one of the world’s major financial centers, where most of the bankers hit by the cap are based, opposed the EU law because it would drive up the fixed pay, arguing that it goes beyond the EU’s powers. At a time of rising British anti-EU sentiment, the new law is also widely seen as a highly sensitive subject. However, UK Finance Minister George Osborne was eventually forced to concede defeat after an adviser to the bloc’s top court said he supported the limit on banker bonuses and that it did not restrict total pay. Mr Osborne stated that he is “not going to spend taxpayers’ money on a legal challenge now unlikely to succeed,” while adding that “The fact remains that these are badly-designed rules that are pushing bankers’ pay up, not reducing it.”
The defeat is likely to further empower the anti-EU campaigners who object to having decisions imposed by Brussels. In particular, the UK Independence Party, which rejects the EU’s influence over Britain, won a vote held yesterday (20 November) that gave it a second seat in the British parliament. Standard Chartered, Barclays and HSBC have raised allowances to make up for the impact of the bonus cap while Bank of England governor Mark Carney and others have suggested that bankers’ fixed salaries may also need regulating.