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Advocate General rejects UK challenge to EU legislation capping bankers’ bonuses

Advocate General rejects UK challenge to EU legislation capping bankers’ bonuses

By Anna Beale

In an Opinion delivered today,[1] Advocate General Jääskinen has rejected the UK’s challenge to the provisions in the EU’s “Capital Requirements” legislation (comprising Directive 2013/36/EU and Regulation (EU) No 575/2013) which purport to regulate the amount of bankers’ bonuses and promote greater transparency in relation to remuneration packages.

Directive 2013/36/EU includes a provision imposing a set ratio between fixed remuneration (basic salary), and variable remuneration (bonus) for individuals whose professional activities impact on the risk profile of financial institutions. Such individuals may not be paid a bonus exceeding 100% of their basic salary, which can be increased to 200% if Member States decide to confer this power on shareholders, owners or members of these financial institutions.

Regulation (EU) No 575/2013 requires financial institutions to disclose the ratio outlined in the Directive, and also details of (i) the number of individuals being remunerated over a certain threshold and (ii) the total remuneration of each member of their management body/senior management if this is requested by the Member State or a competent authority.

In case C-507/13 (UK v European Parliament and Council of the European Union), the UK deployed a number of legal arguments in an attempt to annul these provisions.

  •          The UK’s primary argument was that the “fixed ratio” measures could not be adopted using the Treaty provisions concerning the freedom of establishment and the freedom to provide services (Article 53(1) TFEU) as they in fact fall within the realm of social policy and as such within the competence of the Member States. The Advocate General disagreed, noting that the CJEU has already held (in case C-233/94, Germany v Parliament and Council) that measures of this type could be introduced under Article 53(1) TFEU. The variable component of pay could affect the stability of financial institutions operating freely across the EU, and thus its internal financial markets, and as such, the measures in dispute were related to the conditions of access to, and the pursuit of activities of, such financial institutions. Whilst the Advocate General accepted that the determination of pay levels is properly a matter for Member States, he pointed out that fixing the ratio of bonuses to basic salaries does not constitute fixing the level of pay, because there is no limit imposed on the basic salary against which bonuses are pegged.
  •          The UK attacked the provisions relating to disclosure of the total remuneration for each member of the management body/senior management on the basis that they contravened EU data protection law. The Advocate General rejected this challenge, pointing out that the provisions do not require mandatory disclosure, but confer discretionary powers on Member States, the exercise of which would have to take into account EU data protection legislation.
  •          The UK also contended that the principle of legal certainty was violated by the fact that the provisions apply to employment contracts concluded before the Directive came into force. The Advocate General pointed out that the Directive had been published in June 2013, and there had been widespread media coverage, meaning that institutions would have been well aware of these provisions before they took effect at the beginning of 2014.
  •          The UK’s argument that the provisions offended the principles of proportionality and subsidiarity was also rejected, on the basis that the objective of creating a uniform regulatory framework of risk management could not have been better achieved by national governments as opposed to the EU.

The UK’s challenges to certain technical aspects of the legislative package, including the delegation of particular definitional powers to the European Banking Authority, were also rejected.

The Opinion of the Advocate General is not binding upon the Court of Justice, but has persuasive value and is generally regarded as a good indication of the direction of travel, although some commentators have noted that the CJEU disagreed with Advocate General Jääskinen’s Opinion partially upholding the UK’s challenge to the powers conferred on the European Securities and Markets Authority (ESMA) in the short-selling Regulation (Case C-270/12). The Court’s judgment is not expected to be available for several months.

HM Treasury has issued a statement to the effect that it is considering the detail of the Opinion, but also noting that the Opinion itself demolishes the case for the fixed ratio, by demonstrating that the Directive in fact imposes no “cap” on bonuses, because there is no limit on basic salary.[2] This raises the possibility that financial institutions will seek to sidestep the “Credit Requirements” legislation by raising basic salaries, which could in turn lead to further EU consideration of bankers’ remuneration.

 


[1] Summarised in a Curia press release, to be found here: http://curia.europa.eu/jcms/upload/docs/application/pdf/2014-11/cp140154en.pdf

 

[2] http://www.politicshome.com/uk/article/108635/treasury_statement_in_response_to_advocate_general_opinion_on_the_uks_legal_challenge_against_the_eu_bonus_cap.html

 
 
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