Written by Will Sparks, Senior Associate

The UK Chancellor of the Exchequer, George Osborne has admitted defeat in his effort to overturn EU legislation that caps bankers’ bonuses, after an opinion issued by the European Court of Justice (ECJ) comprehensively dismissed the UK’s arguments that the rules are illegal.

The government’s case concerned the CRD IV package of legislation which was aimed, in principle, at overhauling capital requirements rules.  However, it included provisions limiting the variable remuneration that may be paid to ‘material risk takers’ – i.e., capping bankers’ bonuses – at 100% of their fixed salary, or 200% if approved by shareholders.  The package also gave the European Banking Authority powers to define who the rules should apply to, and required the publication of certain salary and bonus details.

The UK opposed CRD IV before its adoption but was outvoted by other EU Member States.  The government then took its fight to the ECJ, claiming that the provisions relating to bonuses were illegal.

A senior legal adviser to the court has now dismissed the UK’s arguments in no uncertain terms (the summary of his opinion is available here).  Advocate General Jääskinen found that the legislation was adopted on a sound legal basis, does not confer any unlawful powers on the EBA and does not conflict with data protection and privacy laws.  He also said that because bonuses can be increased to 200% of fixed pay or set below 100%, this shows the absence of any capping effect. This may surprise anyone who thinks that an upper limit, expressed in definite terms, sounds very much like a cap.

The Chancellor has subsequently declared that he would “not spend taxpayers’ money on a legal challenge now unlikely to succeed”.  In reality, there is very little to be gained by dropping the case at this stage and no taxpayers’ money would be saved by doing so.  The Advocate General’s opinion is the last word in the case before the judges deliberate their decision, which is expected early next year; the UK has already had, and paid for, its day in court.  Although most ECJ judgments do follow the advice of the Advocate General, their opinions are in no way binding and it is far from unheard of for judges to overrule them.  Indeed, the Chancellor may recall that the very same Mr Jääskinen supported the UK last year when it challenged EU legislation curbing short-selling, only for his opinion to be ignored by the court.

At best, withdrawing the case now would be a face-saving exercise that avoids an ECJ judgment against the government.  At worst, it pre-empts a decision which – however unlikely – may yet come out in the UK’s favour.  On balance, at any rate, banks would be best advised to continue planning for a world in which bonuses are subject to EU caps.