EU rejects Osborne's challenge to banker bonus cap

Chancellor George Osborne's challenge to Europe's cap on banker bonuses looks set to be rejected by the EU Court of Justice after it was dismissed by the court's legal adviser today.

Ministers argue that the rules limiting pay-outs to no more than 200% of basic salary encourage the banks to raise fixed pay instead, increasing their business risks.

The UK challenged the proposals on a number of grounds, arguing that the EU had gone beyond its remit and breached a series of legal principles.

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But Advocate General Niilo Jaaskinen today delivered an opinion that "all the UK's pleas should be rejected and that the Court of Justice dismiss the action". It is expected to deliver its ruling next spring.

A Treasury spokesman said: "The Government notes the Advocate General of the European Court of Justice's opinion on our legal challenge against the EU 'bonus cap'. We are considering the opinion and its implications in detail."

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The cap means that bankers cannot be paid bonuses of more than 100%, or 200% if national governments decide to allow firms to increase them to this level.

But Mr Jaaskinen said it was not a "cap" since it was linked to a banker's salary, on which there is no limit to what a bank can pay.

The measure was adopted last year, prompted by concerns that the scale of banker bonuses was one of the major contributors to the 2008 financial crisis resulting in a series of state bail-outs for firms such as Royal Bank of Scotland and Lloyds.

It was argued that the large bonus pay-outs in relation to salaries encouraged excessive risk-taking by bank employees in order to share in short-term profits but not in the cost of failures which in the most serious cases were borne by taxpayers.

Tom Gosling, head of PwC's reward practice, said: "It seems unlikely now that the Court will overturn the Advocate General's opinion, so banks should continue planning on the basis that the bonus cap will still be in force next year."

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