25 September 2013

GOV.UK: Legal challenge launched into new rules on bankers' pay

These new rules are contained within the EU’s latest legislation governing the amount and types of capital that banks must hold, which is called the Capital Requirements Directive IV (CRD IV).

Britain has been at the forefront of global efforts to tackle unacceptable pay practices in the banking sector, leading efforts to make banking more responsible and installing some of the toughest remuneration rules of any major financial centre.

The government’s tough and rapid action has seen real improvements in the alignment of bankers’ pay with risk and performance, and a significant shift in the way bankers are paid. This has lead to a substantial reduction in upfront cash bonuses which can encourage short-term risk taking.

In the government’s view, the EU’s latest legislation in this area should be about building on all this work to make banks safer and their pay policies more acceptable.

However, the provision for a ‘bonus cap’ under CRD IV - which was introduced without any assessment of its impact or supporting evidence - will undermine the significant progress that has been made to implement pay practices that support financial stability.

Britain is therefore launching a legal challenge as the legislation, as currently drafted, is not fit for purpose - to improve stability across the banking system. The proposals will lead to an increase in fixed salaries which would do the opposite.

A Treasury spokesperson said: “These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers’ fixed pay up rather than down, which will make banks themselves riskier rather than safer. In other words, as the Chancellor has said, they may undermine responsibility in the banking system rather than promote it.”

“Regulation of pay in this manner goes beyond what is permitted in the EU Treaty. That’s why we are challenging these rules in the European Court, to ensure the legislation respects the EU Treaty and actually achieves what it’s meant to. A more stable banking system that serves the economy, businesses and consumers.”

Full news

Britain must apply European Union-imposed caps on bankers' bonuses while its legal action against the law is being examined, a spokeswoman for the European Commission, the EU's executive arm, said. The UK government's lawsuit, "doesn't mean that the legislation in force will be suspended", a spokeswoman for internal market commissioner Michel Barnier told reporters at the Commission's daily news conference. "The UK will have to apply all the rules that are going to be applicable", she said.

Further reporting © WSJ

Translated from the German

In a press release, Vice-President of the European Parliament, MEP Othmar Karas commented that the action of the British Parliament was an "obvious internal political manoeuvre without substance". He was awaiting the lawsuit with equanimity, he said.

Karas was the chief negotiator of the EU banking regulation which was passed in parliament in April and in which it was decided that bankers' bonuses would be capped. "In the months of negotiations, the British have never tabled the arguments they are using now. The fact that they use them now is late and transparent", said Karas.

The lawsuit filed by the UK was an "attempt to obstruct the necessary change in culture on financial markets", he stated, "and this change has been instigated and will be pursued and pushed further by the European Parliament". How isolated the United Kingdom was in this had been demonstrated by the vote in the European Parliament, he recalled: The EU banking regulation scheme was approved in April with 608 votes for and 33 votes against it.

Full press release (in German)

EPP-press release

In response to the UK Government’s legal challenge to the remuneration provisions in CRD4, Simon Lewis, chief executive, the Association for Financial Markets in Europe (AFME), said: "The banking industry has already made, and continues to make, progress in changing remuneration policies and addressing the issues around variable pay and its relationship to performance and risk.

"We believe that the remuneration provisions in CRD4 would add nothing more in tackling these issues and would have a number of unintended and negative consequences for Europe’s banks. In particular the CRD4 provisions would increase the fixed cost base of the industry whilst also undermining the competitive position of a vital economic sector. We therefore welcome this opportunity to review the remuneration provisions of the CRD4 proposals."

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