UK Treasury in legal challenge to EU bonus cap

Big bonuses have been seen by some as driving a risk-taking culture

The UK Treasury has launched a legal challenge against European Union (EU) plans to cap bankers' bonuses.

It would limit the bonus to no more than a banker's salary, although if shareholders agree it could be higher.

The bonus culture has been blamed for encouraging excessive risk-taking among bankers.

The EU commissioner for internal markets Michel Barnier said he was not surprised by the move as the UK was the only member to vote against the plan.

Its objections were outvoted by fellow EU members earlier this year.

The cap is designed to come into effect on bonuses awarded from 2014.

It will apply in all the 28 countries within the EU but also to EU banks operating overseas.

The UK has the biggest financial sector in the European Union and would therefore be the most affected by the cap.

Rising pay

The government worries that a cap will simply push up the level of fixed pay to compensate for lower bonuses.

It has a list of six reasons why it believes the cap will not work:

• It is unfit for purpose, and was introduced without any impact assessment

• It unlawfully delegates to the European Banking Authority (EBA) because it concerns policy and is not simply a technical matter

• It is legally invalid because it contravenes the legal base of regulation that expressly excludes legislation "affecting the rights and interests of employed persons"

• It is being rushed into effect without the necessary legislation in place - including rules determining to whom the cap will apply

• It fails to protect personal data

• It wrongfully applies outside the European Economic Area

The Treasury said the EU's bonus cap was likely to "act counter to the stated objectives of the legislation, which are to ensure banks are safer, more stable, and prudentially sound."

It added that it could end up saddling banks with higher salary bills by making it harder to reduce pay rates when profits were falling: "The UK has repeatedly raised concerns that the provisions are likely to lead to increases in fixed pay, which is harder to cut in times of stress, and more difficult to claw back and there is no evidence this will improve financial stability."

Labour's shadow chancellor, Ed Balls, said the issue was a long way down his list of priorities. He said: "It tells you everything about [Prime Minister] David Cameron's government.

"While we, Labour, are saying 'let's get energy prices down for families... let's get people back to work he sends his chancellor to Brussels to stand up for bankers and bankers' bonuses."

Legal flurry

The Treasury aims to challenge the rules in the European Court of Justice (ECJ).

Such cases normally take between 18 months to two years to be heard.

The UK has launched a flurry of legal actions against EU rules recently.

Last week a top adviser to the ECJ backed a UK move against bans on short-selling of shares. Short-selling is when an investor agrees to sell a share he doesn't own, in the hope that its price will fall before he has to buy it to fulfil the order. In other words, it is a bet on a falling share price.

The UK is also challenging a plan to tax financial transactions in some EU states and another plan that would require clearing houses that deal with large amounts of euro-denominated assets to be based within the single currency area.