The Government has been against the introduction of EU legislation imposing a cap on banker’s bonuses from the outset. However, the European Parliament, who proposed limiting the variable amount of remuneration to one times the fixed component of the total remuneration, was able to change the outcome of negotiations. The UK voted against the proposals but due to QMV and the ordinary legislative procedure the cap on bankers’ bonuses has been introduced, which clearly demonstrates that the Government is not always able to form political alliances to stop damaging legislation from being adopted.
The new rules were adopted in 2013 and have entered into force in January 2014. The CRD IV Directive requires financial institutions to set the ratios between the fixed and the variable component of the total remuneration, according to the principle that “the variable component shall not exceed 100 % of the fixed component of the total remuneration for each individual.” Member States may set a lower maximum percentage and allow shareholders, subject to certain conditions, to increase the ration by up to 200%. Thus, bonuses can go up to twice annual salary, if this has been authorised by at least 66% of shareholders owning half of a bank’s shares, or, if there is no quorum, it is supported by 75% of shareholders present.
The bonus cap applies to bankers employed by all European banks’ regardless they are based in or outside the EU. The cap applies to European banks globally but their global competitors face no bonus restrictions outside the EU consequently the City of London has been put at a competitive disadvantage as banks and staff are likely to move from London to other financial centres outside the EU. Moreover, according to the British Bankers’ Association such rules “will make the system less robust by incentivising firms to increase fixed pay.”
After being outvoted the Government had no choice but to launch a judicial challenge before the ECJ seeking the annulment of the CRD package provisions enforcing a cap on bankers’ bonuses on the grounds that they breach the EU treaties. However, unsurprisingly, according to the Advocate General Jääskinen’s recent opinion the EU legislation limiting the ratio of bankers bonuses compared to their basic salary is valid under EU law. Consequently he rejected all the UK’s pleas and recommended the Court of Justice to dismiss the action in its entirety.
The Government believes that Article 53(1) TFEU on freedom of establishment and the freedom to provide services is not the correct legal basis to adopt rules imposing a cap on bankers’ bonus as such measure falls within social policy and, consequently, it belongs to member states competence. The Government has therefore challenged the legal base of the contested measures. First the Advocate General recalled that the ECJ has already held that Article 53 (1) TFEU could be used as a legal basis to adopt “measures aimed at promoting the harmonious development of the activities of credit institutions throughout the EU by eliminating any restrictions on freedom of establishment and freedom to provide services, while increasing the stability of the banking system and the protection of savers”. Then he noted, “the EU can, on the basis of Article 53(1) TFEU, fix for each category of persons, a mandatory ratio between the fixed component and the variable component of their remuneration” as “this part of the remuneration impacts directly on the risk profile of financial institutions, it can affect the stability of financial institutions, and in consequence that of the financial markets of the EU.” In fact, he stressed that the measures challenged by the UK are “related to the conditions of access to and pursuit of activities of financial institutions in the internal market.”
As to whether the measures challenged by the UK should be considered to fall within the remit of social policy, the Advocate General noted that the ECJ has interpreted Article 153(5) TFEU to the effect that member states are competent to fix remuneration levels. In fact, the ECJ held ‘the establishment of the level of the various constituent parts of pay of a worker … is still unquestionably a matter for the competent bodies in the various Member States’, but it also held that the exception provided in Article 153(5) ‘must (…) be interpreted as covering measures (…) which amount to direct interference by Community law in the determination of pay within the Community’.
The Government argued that the CRD IV Package would lead to an increase in the amount of fixed remuneration so that the overall high level of total remuneration can be maintained. However, the Advocate General took the view that fixing the ratio of variable remuneration to basic salaries is not the same as a “cap on bankers bonuses”. According to the Advocate General the CRD IV Directive “does not impose a ‘cap’ on variable remuneration”. In his opinion the limit on variable remuneration contained in CRD IV Directive “… does not impose any limit on the level pay” as “It only establishes a structure for remuneration in the form of a ratio between the fixed level of remuneration and the variable remuneration in order to avoid excessive risk taking”, which “constitutes a legitimate objective to ensure that freedom of establishment of financial institutions and free provision of financial services on the basis of single authorisation and home-country control can function safely in the EU internal market.”
According to the Government the adoption of the obligatory maximum fixed ratio of 100% of fixed salary for variable remuneration also infringes the principles of proportionality and subsidiarity. The Government argued “that even allowing for the margin of discretion conferred on the EU institutions when legislating to preserve financial stability, the contested measures are manifestly disproportionate, and moreover, breach the principle of subsidiarity since the need for them to rectify competitive distortions in freedom of establishment remain unsubstantiated.” However, according to the Advocate General the financial institutions self-regulation would not be enough to create the required remuneration policies for preventing excessive risk taking. Moreover, he stressed, “it is evident that the goal of creating a uniform regulatory framework for risk management of relevant parts of remuneration policies of financial institutions could not have been better achieved by measures taken at the national level.” Reaching the conclusion that all the procedural requirements on the compliance of the proposal with the principles of proportionality and subsidiarity have been observed by the EU institutions, the Advocate General said there was no breach of these principles and rejected the Government second plea.
The Government also argued that such provisions breach the principle of legal certainty. The Government believes this provision is “retrospective in its effect” as member states were required to apply the CRD IV Directive from 1 January 2014 but it has an impact on employment contracts concluded before its entry into force. However, the Advocate General thought there is no basis on which it can be argued that the CRD IV Directive is retroactive, hence he also dismissed the third plea.
The European Banking Authority has been given the power to draft regulatory technical standards specifying the criteria used to identify individuals who would fall within the scope of the directive, but the Government believes such conferral of powers is ultra vires. The Government argued that the tasks conferred on the EBA by the CRD IV Directive exceed the scope of the powers granted under the EBA Regulation. However, the Advocate General Jääskinen pointed out that the CRD IV Directive only confers no binding decision-making power on the EBA and that the European Commission is only empowered to complete the non-essential elements of legislative acts. Moreover, he noted that EBA draft measures have no legal effects unless the Commission adopts them. Hence they are unable of harmonizing any national provisions as well as affecting the rights and obligations of individuals. Unsurprisingly, according to the Advocate General, the delegation of power to the EBA is valid, consequently he also dismissed the fourth plea.
The Capital Requirements package requires financial institutions to disclose the abovementioned ratio as well as the number of individuals being remunerated over a certain threshold. Moreover, Member States and competent authorities may request their financial institutions to disclose information about the total remuneration of each member of their management body or senior management. The Government has argued that such measures, requiring disclosure of remuneration, breach the right to privacy and data protection rules. The Advocate General acknowledged that member states are not allowed to require any disclosure in contradiction with EU data protection law. However, he noted that the disclosure contended by the UK is not mandatory and that the financial institution can always challenge the legality of any decision imposing such disclosure before a judicial authority. Hence, he also rejected the Government’s fifth plea.
Furthermore, the Government argued that the bonus cap also infringes the principle against extraterritoriality under customary public international law as it also applies to employees of institutions outside of the EEA. However, the Advocate General rejected the Government’s plea as inoperative.
The Government has failed so far to win stronger safeguards to protect the City of London’s interests. It has been launching legal challenges at the ECJ to limit the impact of the EU financial regulations however this strategy was doomed to fail. The ECJ is chiefly a political court and it is unlikely to protect the City’s interests against EU regulations. In fact, the ECJ has already decided against the UK in two of the cases, short selling and the financial transaction tax, rejecting all the Government’s pleas, and it is most likely to decide against it in the bonus cap case too. The ECJ’s ruling on short selling has shown us that the Court is unlikely to annul EU regulations indented to ensure financial stability, particularly in the eurozone, and, it should be noted, that the Advocate General’s opinion has followed this approach.
The Advocate General’s opinion is not binding on the ECJ but Court is very likely to follow it. Hence, following this opinion, George Osborne had no choice but to withdraw his legal challenge to EU legislation that caps the level of bankers’ bonuses, as he recognised “It now looks clear that there are minimal prospects for success with our legal challenge, so we will no longer pursue it”. He said, “The fact remains these are badly designed rules that are pushing up bankers’ pay not reducing it. These rules may be legal but they are entirely self-defeating…” But, he has decided not to spend further taxpayers’ money on a legal challenge doomed to fail.
It is important to recall that the European Commission is already planning to challenge the use of “cash allowances”, which have been cleared by the UK’s Prudential Regulation Authority. The EBA published, in October, the result of its investigation on discretionary remuneration practices across the EU banking sector. According to EBA “competent authorities across the 28 EU Member States have reported that 39 institutions use ‘role-based’ or ‘market value’ allowances, which the institutions classify as fixed remuneration.” EBA stated in its opinion “that ‘role-based allowances’ which are not predetermined, are not transparent to staff, are not permanent, provide incentives to take risks or, without prejudice to national law, are revocable, should not be considered as fixed remuneration but should be classified as variable in line with the letter and purpose of the CRD.” EBA is therefore implying that the use of “cash allowances” breaches EU law, namely the bonus cap and other requirements included in the EU Capital Requirements Directive. In fact, EBA’s calls for the EU competent authorities to “use all necessary supervisory measures to ensure that by 31 December 2014 institutions’ remuneration policies are updated to reflect the findings of this Opinion that such allowances should be classified as variable remuneration and that payments of such allowances are not causing institutions to contravene the bonus cap and other CRD requirements.” The EBA’s opinion is not legally biding but EBA is planning to publish new guidelines next year. As noticed by Alex Barker, in The Financial Times, “The defeat at court is likely to lead to the PRA gradually enforcing a stricter interpretation of the bonus cap, which will in turn increase fixed pay at many banks, according to pay consultants.” The UK’s bank use of the “cash allowances” is very likely to be deemed inconsistent with the bonus cap rules, and this practice would have to be scrapped.
The UK is losing control over financial services and banking in the City of London. The financial crisis has led to an overhaul of the EU regulatory and supervisory framework, the Commission has tabled over 40 proposals in less than 5 years. There is a EU’s ‘power grab’ over regulation of the British financial services industry. The City of London is subordinate to the EU jurisdiction. The Westminster Parliament under the European Communities Act 1972 is obliged to accept the EU legislation and the final jurisdiction of the European Court of Justice. We have been seeing a shift of financial regulation from the UK to the EU, and bit-by-bit EU regulation would be taken over from national regulation. This is irreversible, unless the European Scrutiny Committee’s proposal for desaplication of EU legislation notwithstanding the European Communities Act 1972 is introduced.
Lord Hill is in charge of proposing legislation in this area, and, theoretically, he could have an important role in deciding the number and direction of EU financial regulation. However, his room for manoeuvre is very limited, particularly to protect the City interests. In fact, Lord Hill said to the MEPs “I am not here as a representative of the City of London, I am here to represent the European interest”. He is required to put EU regulation above Britain’s national interest. Moreover, the concentration of power in the hands of the European Commission President and his Vice-Presidents will further ensure that the Commission represents the EU’s general interest rather than member states individual interests. The “senior commissioners”, namely Mr Dombrovskis and Mr Katainen, who have veto power over any initiative, would be able to block any proposal that Lord Hill might put forward ensuring that the UK, and the city interests, are protected. Mr Juncker is not planning to repeal EU financial regulations. Lord Hill would not be able to get the European Commission, the other Member States, and the European Parliament to agree to a satisfactory change to the EU secondary law, which would entail repealing the burdensome regulation, which is already in force and is threatening the competitiveness of the City of London. Furthermore, he won’t be able to avoid further financial market regulation, as he has to comply with Juncker’s political agenda and policy priorities. There is no doubt that the European Commission will continue to proposed more legislation affecting financial services, which is then subject to the CJEU’s jurisdiction. The UK would have no say in setting up the EU agenda for this policy area. The EU financial regulations will be mainly intended to address the eurozone interests and protect the single currency.
The Government’s power to influence EU legislation is very limited due to QMV. In fact, due to QMV and the ordinary legislative procedure, the UK has been outvoted and forced to accept measures against the national interest such as the EU Regulation on short selling and certain aspects of Credit Default Swaps (CDS), the damaging Directive on Alternative Investment Fund Managers and the EU legislation imposing caps on bankers’ bonuses.
It is important to recall that QM is now calculated according to double majority: 55% of EU Member States (15 Member States) and 65% of the EU’s population. The new voting arrangements, with a lower double majority threshold, would mean that the UK will find its interests overruled by the other Member States even more often than before. In fact, the eurozone has qualified majority and the chances of the UK being able to influence EU’s policies and legislation would be even more limited.
The Government was able to negotiate the so-called ‘double majority’ voting mechanism to protect the Single Market and non-eurozone member states from being continuously overruled by the eurozone member states. Under this mechanism, which applies in the European Banking Authority, all legal proposals require a majority of both eurozone and non-eurozone countries to be adopted. As Bernard Jenkin noted, the government “safeguards” in the EBA’s voting arrangements “would make no difference” as “Once the Euro-states agree on new measures within the banking union, the Commission will propose the same new measures for all banks in the EU, in the name of the single market, whose provisions are decided by qualified majority vote.” Moreover, the voting arrangements will be review when there are four or fewer non-participating Member States in the banking union. Far from being a strong safeguard, it could ensure that the UK has a say in the making of banking rules. Yet, under pressure from MEPs, Lord Hill has ruled out “double majority voting” as a model for the future. In fact he said, “I agree that such rules are not desirable in a well-functioning single market where trust prevails among Member States.”
The ordinary legislative procedure enables the European Parliament to override a decision taken by the Council. It is well know that the European Parliament has been voting against the City. Within the ordinary legislative procedure the Council and the European Parliament have competence to make amendments to any legislative proposal put forward by the Commission, introducing, in this way, a stricter rule than the originally proposed. As the bonus cap clearly shows, the UK might not be able to prevent disadvantageous amendments that the European Parliament or other member states might try to introduce to a proposal during the negotiations. On the other hand, the UK is not always able to form political alliances to stop damaging legislation, or to introduce changes, particularly if there is an earlier agreement and a compromise deal is reached between the Council and the European Parliament. On top of that, once such measures are adopted the UK is subject to the Commission enforcement powers and to the CJEU jurisdiction.
Hence, there is not much the Government can do while QMV and the ordinary legislative procedure are the rule, and this is the main issue, as the UK has been forced to accept EU measures against its will. Thus, Britain’s future is dependent upon rejecting Qualified Majority Voting and the Ordinary Legislative Procedure, which represents a dangerous invasion of the sovereignty of the UK Parliament.
The ECJ’s judgments against the UK stress the urgency in adopting the European Scrutiny Committee proposals: the introduction of a unilateral veto and disapplication of EU legislation notwithstanding the European Communities Act 1972. It is important to recall that Bill Cash’s Sovereignty Bill introduced a unilateral veto over EU legislative proposals and included clauses on disapplication that would have enabled Parliament to disapply legally binding EU measures. In fact, it would have ensured that all EU proposals that are adopted despite UK opposition “shall not form part of the law applicable in any part of the United Kingdom.”
Without a fundamental renegotiation of the treaties, there is nothing the Government can do to protect the UK and the city interests against EU financial services regulation, unless it amends the ECA 1972 introducing a unilateral veto over EU legislative proposals and disapplication of EU legislation notwithstanding the European Communities Act 1972, which are not in Britain’s national interest. This would enable the UK to regain regulatory sovereignty over financial and baking matters whilst the City would be able to regain its competitiveness. As Bill Cash has been saying it is only the Conservative party that can deliver change on the European issue but this requires the acceptance within the Conservative Party of fundamental renegotiation of all the treaties, the supremacy of Parliament and a fundamental change in the structural relationships of the UK to the EU, as nibbling at the Treaties wont do the job.
