George Osborne takes EU to court over bank bonus cap

Britain is taking legal action against an EU cap on bankers’ bonuses in an attempt to strike down the measure on the grounds that it hurts financial stability.

George Osborne, the UK chancellor, filed the case at the European Court of Justice last week – in a step to protect pay freedom that most banks thought would be too politically unpalatable for the Treasury .

His move came after breakthroughs this month for the UK in Brussels, including significant headway in a court case to clip the powers of an EU market watchdog on short selling. The suit is the fourth launched by Mr Osborne on an EU financial services issue in the past two years.

The Treasury said the bonus cap threatened moves to increase financial stability. “These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers’ fixed pay up rather than down, which will make banks themselves riskier rather than safer. In other words, as the Chancellor has said, they may undermine responsibility in the banking system rather than promote it.

“Regulation of pay in this manner goes beyond what is permitted in the EU treaty. That’s why we are challenging these rules in the European court, to ensure the legislation respects the EU treaty and actually achieves what it’s meant to – a more stable banking system that serves the economy, businesses and consumers.”

While investment banks have long thought that there were grounds for a legal challenge, few believed that Mr Osborne had the appetite for a legal fight to protect banker pay, given the political sensitivity of the issue.

The leader of the opposition Labour party, Ed Miliband, mocked Mr Osborne for standing up for the right of bankers to take home big bonuses. Labour delegates at the party’s conference shouted an ironic “aahh” of sympathy when Mr Miliband said proposed new EU rules might restrict their payouts.

Phillipe Lamberts, a Green MEP who led calls for the bonus cap, said: “The prudential soundness of a measure is for policy makers, not judges, to assess.”

Mr Osborne argued throughout the negotiations that the cap would lead to an increase in fixed pay, which is harder to cut in times of stress or claw back if a bank suffers financial problems.

A second argument relates to the “unlawful” tasks delegated to the European Banking Authority, which is required under the legislation to determine which staff the cap will apply to. The UK said this was a policy issue, rather than a technical matter.

Mr Osborne’s case also challenges the legal base for the reforms, the lack of legal certainty, its wrongful application outside the EU and its potential contravention of data protection laws.

In depth

Bank bonuses

The issue of bankers’ bonuses continues to be a political hot potato as lenders defy political and public pressure to curb payouts

The bonus cap was included in an overhaul of capital rules for banks, which Britain voted against, largely because of the pay restrictions. It was the first time that the UK had been outvoted on a major piece of EU financial legislation since the 2008 financial crisis.

While the proposed upper limit on bonuses is poised to hit tens of thousands of staff around the globe its biggest impact will be in London.

A response from the British Bankers’ Association to the EU rules estimated that 35,117 staff at banks worldwide would be captured by the bonus cap, with two-thirds of them based in the UK.

European banks’ human resources departments and lawyers have spent the past few months exploring ways around the limit on bonuses, amid fears that the new rules could prompt an exodus of senior talent to overseas rivals, which will only have to adhere to the rules within Europe.

Besides increases in salaries, such measures include the possibility of raising allowances and ramping up benefits such as pensions and company cars.

“A behavioural response of banks to the proposal will be for institutions to increase the level of an individual’s fixed pay. This has already happened,” the BBA said in a response to a draft plan by the European banking regulator that aimed to widen the definition of staff to be affected.

The regulator proposed in May to include anyone earning more than €500.000 in the bonus cap.

Lawmakers are targeting bankers’ bonuses because they view them as one of the causes of the financial crisis and scandals at some banks, as traders were seen to be encouraged to take excessive risks.

Douglas Flint, HSBC’s chairman, warned last month that the limit on variable pay would have a “highly damaging impact” on the bank’s ability to compete in key markets.