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Thursday, November 20, 2014

UK looking down and out on banker’s bonus cap challenge

It’s a bad start to what looks as if it could be a very challenging day for the UK government with UKIP looking likely to win the by-election in Rochester and Strood.

This morning the European Court of Justice (ECJ) Advocate General Niilo Jaaskinen issued his opinion on the UK’s challenge against the EU’s banker’s bonus cap and it does not make good reading for the UK. Jaaskinen suggested that “all the UK’s pleas should be rejected and that the Court of Justice dismiss the action”. The key points of his reasoning are:
  • The legal basis of the legislation cannot be challenged since remuneration in this sector “impacts directly on the risk profile of financial institutions”, since these operate freely across the EU this can have impacts on markets across the EU.
  • Jaaskinen “accepts that the determination of the level of pay is unquestionably a matter for the Member States”, but since the law is just a stipulation of the ratio and not a direct cap on pay, there is still flexibility to set pay levels.
  • The delegation of power to the European Banking Authority (EBA) is “valid” since it is “merely empowered to elaborate non-binding draft measures” – i.e. create technical standards.
  • There has been sufficient notice of the legislation to allow firms time to adjust to the new rules.
A fairly comprehensive rejection, but there are a few points which we believe have been overlooked or under discussed, laid out below.
  • One of the UK’s main arguments is that this law will result in higher fixed pay which makes remuneration less flexible and raises fixed costs for banks, thereby undermining any attempt to improve financial stability. This issue is not addressed at all in the opinion. Furthermore, while the opinion addresses the issues of remuneration impacting risk and the fact that fixed pay can still vary it does not look at how the two can interact. It is clear that as a result of this fixed pay will increase substantially but there is no question of how this impacts stability. This may be more an economic/financial point but given the issues are discussed separately their interaction should also be examined.
  • The ruling could also have interesting implications for EU jurisdiction when it comes to the rate of pay. Variable pay is very loosely defined. For example, standard overtime paid at double the hourly rate could theoretically fall under EU jurisdiction by the definition used here. This highlights the importance of this ruling as a step into an area which the EU has previously largely steered clear of and the potential precedence it creates. This could develop in many unknown ways in the future.
  • There is no mention of the UK’s claim that this violates international law or is extraterritorial since it applies to all employees of EU banks no matter where they are based. We noted this may not be entirely a legal issue for the ECJ but it deserves some attention. Related to this, it remains unclear whether third countries firms operating in the EU will be forced to institute similar caps if there are to be deemed ‘equivalent’ under rules coming in under MiFID II in 2016.
  • One of the weakest points seems to be on the powers transferred to the EBA. Control over technical standards, particularly here, should not be dismissed lightly. The regulation deals in very broad strokes and leaves significant interpretation for the technical rules – including the exact level of the cap and who it will apply to. This power is being borne out right now with the EBA passing judgement on the way in which the rules are being implemented and whether ‘allowances’ count as variable pay. The EBA retains significant power to judge how the rules are being implemented and adjust the technical standards if it think the spirit of the rule is not being followed.
  • In general, the combination of the ECJ and EBA seem overly focused on the UK (accepted the UK has been pushing the issue as well). But looking at the legislation which Germany has passed on this issue, there are serious questions over how it has implemented the rules. Germany has exempted anyone covered by collective bargaining from all the remuneration requirements of CRD IV, including the bonus cap. This is because collective bargaining is a constitutional right in Germany and cannot be overridden. While it’s not clear how many people this applies to, the principle is concerning and it is a significant exemption. Why this does not merit examination while the use of allowances as a de facto exemption does is not clear.
What happens now?
  • The full ECJ ruling will come early next year and is likely to be in line with the opinion – although the ECJ did previously ignore Jääskinen’s opinion on short selling where to leant towards siding with the UK.
  • The EBA will publish updated guidelines and technical standards in the new year which will incorporate its concerns about allowances. At this point the UK will likely find itself squeezed by both the EBA and ECJ and could face punishment if it is not seen to be implementing the rules properly. The UK could of course refuse, but given the high profile nature of the issue it could escalate the situation. One option for the UK would be to point to other infringements such as the German example above.
  • In terms of the bigger picture, though not a huge issue on its own, this will be another ruling which plays into the hands of those who wish to see the UK exit the EU. It also continues to add to concerns over the role of the ECJ and its ability to be an impartial arbiter, particularly on financial services – an aspect which will likely be crucial if the UK is to remain an EU member both in the short and long term.


Jesper said...

The justification for the directive as quoted from Jääskinen:
"Often involving sizeable bonus pay-outs in comparison to salaries, this encouraged employees to engage in excessive risk taking in order to share in the banks’ short term profits, but not in the cost of their
failures which, in the most serious cases, were borne by the taxpayer. "

The directive does nothing for this. The costs of their failures will still be borne by others than the risk-takers. The directive fails in its own justification.

Since it does not relate to its justification it is almost by definition just meaningless red tape.

& this justification:
"this can have impacts on markets across the EU"
Can have? Might have? Is likely to have?
Seriously, if 'can have' is sufficient for EU-legislation then anything and everything can and will be regulated at EU level.

In addition the cynic in me is a bit sceptical.... The situation portrays UK as a defender of fat-cat bankers. If the EU is 'fighting' someone bad the EU must be good right?
The enemy of my enemy is my friend...
Will the portrayal help or hinder reform the EU?
Will the portrayal influence the public opinion in UK in regards to EU?

David Horton said...

Unless you live or work or depend on the square mile, you probably don’t give a monkeys about bankers not getting big bonuses.
They aren’t going to starve, are they?

If they spent their bonuses in the UK economy, fine.
If they invested in UK businesses, great.
If they went willingly to the taxman and paid what they owe, marvellous.

But they don’t. Instead they slither off to Cayman Islands, Bermuda or Juncker’s Luxembourg with their carpet bags, leaving everyone else to pay the tax shortfall caused by them.
So no, I have no sympathy for them whatsoever.

But there is a principle here that I am struggling with. London is a banking city. These measures are being brought in solely to hurt London as a financial centre, by a spiteful and bitter EU, desperate to loosen London’s stranglehold on European finance.

I don’t want dealers and brokers to earn millions while a nurse get £22,000. But I don’t want the EU to poke its interfering and vindictive nose into UK business.

Average Englishman said...

This all just follows the usual pattern:

1) The EU Commissars come up with an illogical law that the UK authorities think is ill conceived and unfair or at least unhelpful and expensive for the UK.

2) Dave and his crew make a big song and dance about how awful the new proposals are and how they are going to fight for the UK's interests all the way in the council chamber and in the courts but really, mostly in the media.

3) Then the daft EU law gets put firmly in place and the UK civil servants meekly administer it to the very last bonkers letter, whilst Dave et al try to quietly
bury the story and hope no-one really notices.

These edicts from Brussels come in a never ending stream but unfortunately for Dave, more and more people in the UK are actually noticing. The good people of Rochester & Strood noticed all right and so will many more at the forthcoming general election.

The sooner UK voters get control of their country back the better but in the meantime, I think I may just put some English flags over my house to annoy a few 'champagne socialists'.

Rollo said...

As soon as we are out of the EU, the British Government can choose its own regulatory system.