The advocate general of the European Court of Justice has rejected the UK’s legal challenge to its proposed cap on bankers’ bonuses.
The cap restricts bonuses to 100 per cent of the banker’s pay or 200 per cent with shareholder approval.
In a challenge brought by Chancellor George Osborne, the UK had argued that the proposals breached member states’ freedom of establishment and freedom to provide services.
In an announcement today, advocate general Niilo Jaaskinen has decided the cap is legally valid.
While the court is not bound to follow the advocate general’s opinion, his views will be influential and act as a major blow to the UK’s challenge. A final decision will be made by the court next year.
Jasskinen says: “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.”
Critics of the cap have argued it could result in a flight of talent from the City and an increase in basic pay.
Last year, FCA chief executive Martin Wheatley warned that a cap on bonuses could see bankers’ salaries double.
Pinsent Masons financial services employment specialist Steven Cochrane says the decision is “disappointing” for the UK banking industry.
He says: “While the European Court of Justice is not bound to follow the advocate general’s opinion, it will likely influence the court’s deliberations and will be persuasive.
“Banks have topped up base salaries with ‘role-based allowances’ to mitigate some of the impacts of the cap but the European Banking Authority has warned that most of these allowances amount to variable rather than fixed pay and therefore breach EU law. It’s likely that the court will follow the advocate general’s opinion.”
Cochrane adds: “London, Europe’s biggest financial centre, is facing some of the world’s toughest restraint on banker pay. This could significantly hamper Europe’s ability to attract and retain talent compared to other global financial centres.
“This could result in a complete overhaul of how the industry pays its workforce.”