The Advocate General of the EU Court of Justice has rejected the UK’s challenge to its cap on bankers’ bonuses.
The cap restricts bonuses to 100% of banker’s pay or 200% with shareholder approval.
Advocate General Niilo Jääskinen gave an opinion that the EU legislation limiting the ratio was valid.
The cap on the ratio is designed to reduce incentives for bankers to take excessive risks but critics say it will push up basic pay and banks’ costs.
The UK government challenged the legislation asking the Court of Justice in Luxembourg to consider six arguments challenging both the scope and the legal basis for the new rules.
Advocate General Jääskinen said: “Fixing the ratio of variable remuneration to basic salaries does not equate to a ‘cap on bankers bonuses’, or fixing the level of pay, because there is no limit imposed on the basic salaries that the bonuses are pegged against.”
Analysis: Theo Leggett, Business Correspondent
The advocate general’s opinion may not be legally binding, but it still amounts to a slap in the face for the UK government.
The new rules were introduced to prevent senior bankers from taking excessive risks in the hope of gaining big short term rewards. EU policymakers think this kind of behaviour was one of the factors which led to the financial crisis.
But the UK government thinks there’s no evidence to suggest a bonus cap will make the banking system any safer. In fact, it believes it could make matters more precarious – because large fixed salaries aren’t as easy to cut during a downturn.
The government put forward six legal arguments to support its case; the advocate general thinks none of them hold water.
However, he does make one rather interesting point. He says that because the level of bonus is linked to annual salary, and there is no cap on salaries, there is not really a bonus cap at all.
That is a point the Treasury agrees with wholeheartedly – and which it claims undermines the whole rationale of the new rules.