Banks plot to sue EU over bonuses

Banks have hired lawyers to look into suing the EU if Brussels imposes new restrictions on bonuses that they say would wreck their businesses, City A.M. has learned.

The Association for Financial Markets in Europe (AFME), an industry group representing banks across the continent, has brought in top law firm Clifford Chance to see whether it can use a precedent set by a European court ruling on footballers’ pay to defend banks’ right to award bonuses.

The Bosman ruling by the European Court of Justice (ECJ) established that EU treaties give football players the right to free movement within the EU and the freedom to negotiate their own pay with clubs. The 1995 judgment set the scene for a large increase in footballers’ pay.

Lawyers are examining whether a proposal from MEPs to impose a fixed one-to-one ratio between a banker’s salary and bonus – meaning that a bonus could never be more than basic pay – contravenes the rights awarded by the Bosman ruling.

MEPs have compiled a long list of suggested changes to European capital rules, many of them to do with pay. But it is the bonus-salary ratio that has spooked banks the most because they see it as the amendment most likely to make it into the final rules.

If it were brought in, they argue it would turn their cost models upside-down, since most top bankers are rewarded mostly with a variable bonus that changes depending on their annual performance.

With EU employment law also making it harder to fire under-performing bankers, one expert said that it would simply result in “richer and less motivated bankers”.

MEPs’ amendments are often vetoed during negotiations between the European Council, made up of member states, the European Commission, led by Michel Barnier, and the EU parliament.

But banks are fearful because, unlike with many radical MEP changes, it is not clear if anyone on the Commission or Council will want to champion the politically toxic cause of bankers’ pay.

Britain’s coalition government rejected the idea of imposing its own bonus-salary ratio earlier this year but is already fighting on many fronts in the argument over capital rules.

A spokesman for AFME said: “We’re concerned about the proposals on compensation, which fail to take account of the significant progress the industry has made and we particularly strongly oppose quantitative ratios on pay.”

But there is a sharp division among Europe’s banks over the wisdom of pursuing a case even if they don’t get their way. Some suggest that even if they won, it would be tantamount to political suicide.