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London banks to file case against EU

Bonus cap regulation.

The big banks in the City of London are considering filing a case against the European Union (EU) over rules to limit bonuses after receiving legal advice from diplomats.

The Chancellor of the Exchequer George Osborne is planning to fight a rearguard action to revise the terms of the cap.

A legal advice given to a top bank argues that the proposed ban on bonuses that exceed salary breaches European law because of an EU treaty provision that prohibits regulating pay in member states, according to the Financial Times.

A confidential advice from law firm Shearman & Sterling states: “We believe, on balance, that a mandatory provision fixing the maximum salary-bonus ratio payable in the banking sector not only contravenes European law because the EU lacks the requisite competence to legislate on issues relating to pay, but may also violate the constitutions of certain member states, such as Austria, Germany and Poland.”

The European parliament argues that the bonus ratio does not regulate total pay and is justified as prudential financial measure, rather than as social policy. The EU said: “We are confident this proposal is absolutely legally sound. Excessive bonuses [at banks] led to excessive risk and taxpayers having to step in. That explains why prudential regulation is needed.”

Osborne, who earlier sanctioned UK legal action to prevent the EU from overreaching its powers in imposing EU-wide bans on the short-selling of financial products, believes that the bonus curbs will backfire.

Osborne is seeking to stretch out negotiations and chip away at the details of the bonus cap, especially with regard to how the rules apply to non-EU banks and to bankers working for European banks outside the EU.

Ashley Fox, a British Conservative member of the European Parliament (MEP), said: “The shoddy attempt to score political points with the City is likely to be rejected by the European Court of Justice, at great cost to the taxpayer,” Fox added.

Stephen Mavroghenis, partner at Sherman, argues that Article 153(5) of the EU treaties “expressly precludes the EU from regulating pay in the member states”, irrespective of the policy area.

A fixed ratio pegging bonuses to salary will be debated by EU finance ministers in Brussels today. However, it is not clear whether there is enough support among ministers to reopen the topic.