Published September 27, 2013
LONDON/BRUSSELS – Britain's challenge to European Union rules capping bankers' bonuses is likely to get bogged down in court long beyond their implementation, and critics say it is more about pleasing domestic voters unimpressed by the loss of powers to Brussels.
The UK, which houses Europe's biggest financial center, was outvoted when the European Union agreed that bonuses must be no more than a banker's fixed pay, or twice that amount with shareholder backing.
The British government is now asking the EU's top court, the European Court of Justice, to rule that the world's toughest curb on bankers' pay is illegal.
This follows its legal challenges to EU plans for a tax on financial transactions, new rules on short-selling and a policy of locating clearing houses in the euro zone.
Its latest case could take up to two years to be heard, by which time the cap will be common practice, and Britain has said it would apply it from 2014 as required.
The challenge has been given short shrift by EU lawmakers and the EU's executive body, the European Commission, which will defend the cap in court.
"In the months of negotiations, the British never made the arguments that they are putting forward now," said Othmar Karas, an Austrian member of the European Parliament who played a key role in negotiating the rules.
The bonus cap was slipped in at the last minute into a law that forces banks to hold more capital, and Britain argues that Brussels failed to consult or study its impact first.
"It is a legal requirement for a proposal to have an impact assessment and consultation, but that has not happened. I think their concerns are legitimate," said Alexandria Carr, a former UK Treasury official and now a lawyer with Mayer Brown.
Britain says the bloc's European Banking Authority (EBA) is exceeding its powers in deciding whose pay packet will be affected as this should be done under primary legislation.
It also says that forcing bankers to disclose how much they are earning contravenes the bloc's rules on the "rights and interests of employed persons".
The bulk of the bankers to be affected are based in London.
Lawyers, lawmakers and financial industry officials point out that Britain accepted the principle of curbs on bonuses in current rules that limit how much can be paid upfront in cash.
"We are entirely entitled to put in place a ratio between bonus and salaries," said Arlene McCarthy, an EU lawmaker from Britain's opposition Labour party.
"If the rules kick in at 500,000 euros, which is my understanding, that means they could potentially only earn about 1.5 million euros. My heart bleeds," McCarthy said.
Earlier this month, Britain's challenge to one aspect of new EU rules to regulate short-selling of shares was backed by an adviser to the top court, though the full court has yet to pronounce on this.
"The UK is on a lucky streak with short selling," said one bank lobbyist. "But there is concern that if you do launch a legal challenge, it could take years before you get a ruling."
Britain's court challenges are more a product of its inability to get its way at the approval stage for new rules, said Fiona Wright, director at Cabinet DN, a Brussels-based financial services consultancy.
"It serves the UK purpose of getting their point over in a different forum. All the questions about the UK's status in Europe is not helping, and they are being marginalized at the moment," Wright said.
Britain is on course to hold a referendum in 2017 on whether to stay in the EU and wants to claw back some powers over financial services that have shifted to Brussels.
Critics say the Conservative-led UK government is picking fights with Brussels to stop its core supporters from defecting to the euro-sceptic UK Independence Party (UKIP).
"There is a growing realization in Westminster that we have a problem," UKIP leader Nigel Farage told Reuters. "We have given away control of our biggest industry."
(Editing by Will Waterman)