The UK's challenge to the European Union's bonus cap plan will be heard in the European Court of Justice tomorrow. This will be the final stage in the case opened by the UK Treasury last September.
The new rule, which is supposed to be imposed on all bonuses awarded from 2014 onwards, caps bankers' bonuses at a year's basic salary. If shareholders agree, this may be increased to double their salary. It will apply in all 28 member states, as well as EU banks operating abroad.
But the UK Treasury argued that the cap was "rushed through without a proper impact assessment”. It questioned whether the cap would improve financial stability and said that it was "likely to run counter to the stated objectives of the legislation, which are to ensure banks are safer, more stable, and prudentially sound.”
Other arguments it has put forward include that control of the cap is unlawfully delegated to the European Banking Authority because it concerns policy and is not simply a technical matter, that it fails to protect personal data and wrongfully applies to individuals outside the European Economic Area.
Some banks are finding ways to side-step the rule and still provide their employees with extra pay. Banks such as HSBC, Barclays and Lloyds Banking Group have already paid their chief executives more in shares to add to their salaries and bonuses.
One of the UK's main concerns is that the cap will force banks to pay employees more in fixed salaries in order to make them stick around. These, the Treasury argues, would be more difficult to then cut if a bank's profit fell.
"[The cap] could undermine financial stability by leading to higher fixed costs," a Treasury spokesman said to the BBC.
Since such decisions take on average four to eight months to make, the earliest the court's judgement can be expected is the end of this year.