In the case of United Kingdom of Great Britain and Northern Ireland v European Parliament, Council of the European Union (C-507/13), the Advocate General set out his opinion that the Capital Requirements Directive, which sets a limit on financial sector bonuses via a ratio based on basic salary, is valid. We consider the impact of remuneration provisions in the Capital Requirements Directive in light of the UK legal challenge, which has now been withdrawn.
In response to the global financial crisis in 2008, a series of measures was introduced by the EU to enhance the stability and regulation of financial institutions. The EU considered that excessive risk taking by employees within the financial sector played a major factor in the financial crisis and sought via legislation to take steps to prevent any recurrence.
One of the measures proposed in the Capital Requirements Directive (the Directive) was a set ratio between the basic salary and bonus of individuals whose activities impact on the risk profile of their financial institutions. The impact of this is that individuals cannot be paid a bonus in excess of 100% of their salary or 200% if approved by shareholders. The Directive came into force on 17 July 2013, with the provision on variable remuneration taking effect from 1 January 2014.
The UK brought an action asking the Court of Justice of the European Union (ECJ) to annul this provision, in addition to five other provisions of the Directive.
Advocate General's opinion
The Advocate General issued his opinion on the UK action, stating that the Directive's provisions were valid and that all of the UK's grounds for challenge should be rejected. The Advocate General’s opinion generally serves to guide the ECJ's ultimate decision
The Advocate General made it clear that the determination of the level of pay is a matter for member states. Whilst this would seem to contradict what has been interpreted as a 'cap' on bankers' bonuses, the Advocate General emphasised that there was no limit on basic salaries therefore bonuses were not effectively capped. In short, it is only the ratio between the basic salary and the bonus that is fixed (either at 100% or 200%). Ultimately, as there is no limit to the basic salary that can be paid, there is no limit to the total level of pay or bonus that an individual can receive. Following the Advocate General's opinion, the UK withdrew its challenge to the provisions of the Directive.
The Directive generally applies to those employees of financial institutions whose actions, or those of individuals under their control, would have a material impact on the firm's risk profile. This means that for employees who fall into this category, bonuses based on performance in 2014 and paid in 2015 will have to comply with the ratio set by the Directive.
As highlighted by the Advocate General, there is no cap on the basic salary paid to an employee. Therefore it is anticipated that, in light of reduced bonus pay-outs, basic salaries will increase in order to circumvent the change.
In order to address the loophole of employers increasing salaries in order to be able to keep bonus payments high, the Governor of the Bank of England, Mark Carney, has stated that measures may need to be developed to put employees' fixed pay at risk in order to maintain accountability. One suggestion is to have non-bonus pay paid in the form of 'performance bonds'. Arguably however, this is actually variable pay and therefore should be capped under the provisions in the Directive anyway.