Britain has launched a legal challenge against the European Union's cap on bankers' bonuses. The chancellor George Osborne has warned that the new rules could "undermine responsibility in the banking system rather than promote it".
The cap on bonuses is planned to take effect from 2014 onwards, limiting bonuses to match salaries, unless shareholders vote to raise the cap to twice base salary.
There are six points on which the government will contest the cap:
- Unfit for purpose, and lack of evidence base: The bonus cap provisions were introduced without any impact assessment or underpinning evidence, and are likely to run counter to the stated objectives of the legislation, which are to ensure banks are safer, more stable, and prudentially sound. The UK has repeatedly raised concerns that the provisions are likely to lead to increases in fixed pay, which is harder to cut in times of stress, and more difficult to claw back and there is no evidence this will improve financial stability.
- Unlawful delegation of tasks to the EBA: The assignment to the European Banking Authority (EBA) of the task of setting the criteria to determine the staff covered by the bonus cap unlawfully goes beyond purely technical matters, and concerns policy issues. The delegation also unlawfully requires the EBA to act beyond the scope of Article 114 TFEU (the Treaty Article under which it was established).
- Invalid legal base: The bonus cap requirement is not compatible with the Treaty base for the Directive (which concerns freedom of establishment). The disclosure provisions on individuals’ pay contravene the legal base of the Regulation, which expressly excludes legislation “affecting the rights and interests of employed persons”.
- Lack of legal certainty: The proposals are being rushed into effect without the necessary implementing legislation having been finalised, including the rules determining whom the cap will apply to.
- Failure to protect personal data: There has been no proper analysis carried out as to whether certain pay disclosure provisions intrude too far on the right to privacy and infringe principles governing data protection; and
- Wrongful application outside the EEA: The application of the bonus cap provision outside the EEA is extraterritorial and not properly justified.
Alexandria Carr, regulatory lawyer at Mayer Brown:
Earlier this year the European Parliament reached agreement with a majority of the Council of the EU on the Fourth Capital Requirements Directive (CRD IV), insisting on the inclusion of controversial proposals to cap bankers' bonuses as a condition of their agreement. Despite the UK voting against the legislation because of these proposals, CRD IV has now been adopted. The UK has twice abstained from voting on recent financial services legislative packages that were adopted by qualified majority voting and on both occasions, the UK subsequently brought legal challenges before the European Court of Justice (ECJ) so today’s news isn’t a surprise.
The grounds for a challenge before the ECJ mirror those in a domestic judicial review case: lack of competence, infringement of an essential procedural requirement, infringement of a provision in the EU Treaties or misuse of powers. The Treaties expressly prohibit the EU regulating pay as part of social policy and so it could be argued that the remuneration provisions of CRD IV infringe this provision. The counter-argument, however, is that the provisions do not regulate total pay and are a risk-management tool which build upon the (unchallenged) remuneration provisions of CRD III.