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Out-Law News 3 min. read

EU court advised to throw out UK challenge to bankers' bonus cap rules

The EU's highest court has been advised to throw out the UK's legal challenge against rules that place a cap on the variable pay, generally bonuses, bankers can receive as a proportion of their fixed pay, which generally means salary.

In his newly issued opinion, legal advisor to the Court of Justice of the EU (CJEU) advocate general Niilo Jääskinen said UK claims that the EU bankers' 'bonus cap' rules were configured on an invalid legal basis should be rejected.

Jääskinen advised the CJEU to dismiss all the other claims the UK has raised in its legal challenge too. The UK has argued that the rules represent a disproportionate measure for achieving aims of EU law and that EU law makers were otherwise acting beyond their competency when introducing rules which it said should have been reserved for individual EU countries to address.

The UK has also claimed the rules infringe the EU principle of legal certainty because it calls into question the validity of bankers' remuneration contracts entered into prior to the introduction of those rules. It has also challenged the legality of the conferring of powers on the European Banking Authority (EBA) to interpret the rules and issue its opinion on how they apply in practice.

The rules' interference with bankers' data protection and privacy rights has also been questioned by the UK in its legal challenge. Those concerns relate to the extent that bankers' remuneration needs to be disclosed under the EU rules.

The opinions of advocates general of the CJEU are non-binding but the Court often follows the guidance offered by the legal advisors when making their judgment in the cases before them. A judgment in the UK's legal challenge against the bonus cap rules will not be issued until next year.

Under the EU's capital requirements directive (CRD IV), bankers' variable pay must not exceed 100% of their fixed remuneration in any given year, or 200% of fixed remuneration with the agreement of shareholders.

Financial services employment specialist Steven Cochrane of Pinsent Masons, the law firm behind Out-Law.com, said that if the CJEU follows the advice of advocate general Jääskinen then London, as Europe's biggest financial centre, would face "some of the world's toughest restraint on banker pay". He said that this could significantly hamper London and Europe’s ability to attract and retain talent in the face of competition from other global financial centres.

“This is a disappointing development for the UK banking industry and again throws the question of bankers pay into sharp focus," Cochrane said. "While the CJEU is not bound to follow the advocate general's opinion, the opinion 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 (EBA) has warned that most of these allowances amount to variable rather than fixed pay and therefore breach EU law," he said. "Remuneration policies continue to be under the spotlight and new role-based allowances are under particular scrutiny. The UK's Prudential Regulation Authority has been vocal about its opposition to bonus caps and is likely to lobby for change. This could result in a complete overhaul of how the industry pays its workforce."

Specialist in banking remuneration Graeme Standen of Pinsent Masons said that if the CJEU does reject the UK's legal challenge against the bonus cap rules, new guidance required by CRD IV from the EBA on sound remuneration policies would take on greater importance. Standen said the EBA may consult on that guidance soon, as it is included in the EBA’s 2014 work plan, but with no expected date.

"We can expect lobbying on the way that guidance reflects or develops the recent EBA opinion that classifies as fixed remuneration the role-based allowances widely used by large banks," Standen said. "These role-based allowances have been designed to mitigate the undesirable fixed pay inflation, potential instability and global competitive disadvantage that the bonus cap may cause for EU banks and major investment firms. The PRA has acknowledged the allowances' utility in that context, and made very clear its opposition to the bonus cap. That must help the lobbying process. Looking further forward, the CRD IV remuneration provisions are to be reviewed by the EBA, European Commission (EC) and EU legislature by July 2016, and one of the aspects the EBA and EC must consider is the bonus cap’s impact on competitiveness and financial stability, and whether it should continue to apply to EU banks working outside the EU."

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