The U.K. takes its fight against European Union banker-bonus limits to the bloc’s highest court next week, seeking to overturn a ban on awards of more than twice fixed pay.
The European Court of Justice will hear the British challenge on Sept. 8, as EU regulators vow to crack down on banks that try to get around the rules. Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc are among the lenders that have taken steps to circumvent the bonus limit.
“If you run to the court because you lost the democratic argument, it’s a sign of the weakness of your argument,” Sven Giegold, a German lawmaker in the European Parliament’s Green group and a supporter of the pay curbs, said by telephone last week. “Nobody can deny that the bonus culture has contributed to the harm we have seen all over the world and, ironically, particularly in Britain.”
EU lawmakers campaigned for the bonus limits in a bid to rein in the gambling culture blamed for helping trigger the 2008 financial crisis. They reached a deal with national governments last year to overrule U.K. opposition and include the measure in legislation that overhauled the bloc’s banking rule book.
The rule is set to kick in next year, when it will apply to bonuses awarded based on bankers’ performance in 2014. The EU court has no deadline for issuing a ruling.
“Many banks in the U.K. expect the worst from the ECJ, so have already factored in the bonus cap by planning to increase fixed salaries, resulting in less alignment between performance and pay,” said Syed Kamall, a U.K. lawmaker who leads the EU parliament group that includes British Prime Minister David Cameron’s Conservative Party.
“At worst, the ECJ will ratify an era of higher basic salaries, meaning less alignment between pay and performance,” he said. “At best, it will strike down the bonus cap, giving the FCA and the Bank of England the freedom to monitor and restrict the types of bonuses offered,” he said, referring to U.K.’s Financial Conduct Authority.
Banks including Barclays, HSBC, Lloyds and RBS have begun to pay staff partly through “allowances” that can vary from year to year, and that they don’t count as variable pay.
Andrea Enria, chairman of the European Banking Authority, which oversees how regulators apply EU rules, has said his agency is scrutinizing the practice and will issue guidance by the end of the year.
The EU bonus cap has ‘‘damaging consequences and perverse incentives,’’ U.K. Chancellor of the Exchequer George Osborne said earlier this year. “We are using the European court to enforce European principles of non-discrimination and adherence to European law.”
Salaries for senior bankers rose an average of 26 percent in 2012 as banks prepared for bonus caps, the EBA said in a June report, which surveyed 137 banks across the EU. This signals a “material shift from variable to fixed remuneration,” it said.
Britain was home to 2,188 investment bankers earning more than 1 million euros in 2012, the most in the EU, while Spain had 37, according to EBA data. France and Germany had 117 and 100, respectively. Top U.K. investment bankers were paid an average of 1.95 million euros in 2012, the most in Europe, and had an average bonus-to-salary ratio of 370 percent, according to the survey.
The U.K. has filed a series of legal arguments with the EU court, according to documents published on the ECJ’s website. These range from allegations that the new rules go beyond what’s possible under the EU’s treaties, to arguments that too much power is handed to the EBA to flesh out how the rule should be applied.
The pay curbs are “clearly justified,” said Paul Tang, a Dutch center-left member of the EU parliament’s Economic and Monetary Affairs Committee. Lawmakers “are trying to change incentives to curb excessive risk-taking. We want to learn lessons from the financial crisis, and put these lessons to use. And we want to bridge the gap between bankers and voters.”
While the EU has no specific competence to regulate pay, it can set rules for bankers’ bonuses under its mandate to use regulation to protect financial stability, Giegold said. “The legal base is convincing.”
The U.K. also says the measure infringes principles in international law by applying the curbs beyond the EU’s border.
Under the legislation, the rule will apply to employees of EU banks who are based overseas and to staff of U.S. and other foreign banks who are based in the EU.
The EU approach shares some similarities with measures introduced in the Netherlands, where an industry code of conduct limits bonuses for top banking executives to 100 percent of salaries.
“One of the complaints against the measure has been that it may lead banks to push up fixed salaries, but what we have seen in the Netherlands is that if you do that you will get a public backlash,” Tang said. “There we had the case of ABN AMRO which tried to increase fixed salaries, and this led to public uproar.”
The Dutch government is planning to introduce a tougher ban on bonuses worth more than 20 percent of fixed pay starting in 2015. The planned measures do contain some exceptions for banks outside of the Netherlands or the EU.
The bonus rule challenge is one of a series of court battles the U.K. has embarked upon against EU financial rules, and it is on a losing streak.
Britain last year failed to overturn EU powers to ban short selling, and was told in April that an early challenge against a financial-transaction-tax plan was premature. The U.K. is also contesting ECB policies on clearinghouses that it says discriminate against countries outside the euro area.