Bankers' bonus cap: ECJ hears the UK's legal challenge

The UK Government’s legal challenge seeking annulment of the Capital Requirements Directive IV (CRD4) provisions on bankers’ bonus caps was heard before the European Court of Justice (ECJ) today, Monday 8 September 2014. The cap applies to variable remuneration awarded to Identified Staff for “services provided or performance from the year 2014 onwards”.

The Advocate General’s opinion will be presented on 20 November 2014 and could indicate the views of the ECJ ahead of its decision being released in early 2015. Today’s hearing provided an initial indication of points of particular interest for the ECJ ahead of its decision. The case was heard by the Grand Chamber of 15 judges, indicating the importance of the case. The UK government seeks to annul both (i) the bonus cap provisions and (ii) the delegated powers granted to the EBA to determine and specify the criteria by which material risk takers are identified and to develop guidelines for the discount rate to be applied to long-term variable remuneration.

In March 2014, the ECJ refused the UK government’s request for an expedited hearing, rejecting arguments that it would be difficult to reverse contractual changes being put in place in anticipation of the cap if the ECJ were ultimately to annul the bonus cap and that the financial stability of the banks was at risk. 

The hearing

The UK government’s case is based on the following arguments:

• The bonus cap has no proper legal basis in the Treaty on the Functioning of the European Union (the “Treaty”);
• The bonus cap is disproportionate and/or it would be more appropriate for any such action to be decided at a national level;
• The bonus cap has been brought into effect in a manner which breaches the principle of legal certainty;
• The assignment of certain tasks to the European Banking Authority (EBA) and conferral of certain powers on the Commission is outside the remit of these institutions;
• The identified disclosure requirements in the Capital Requirement Regulation breach principles of data protection and privacy under EU law; and
• To the extent that the bonus cap is required to be applied to employees of institutions outside the EEA, it infringes the Treaty and the sovereignty of countries outside the EEA.

The ECJ asked the parties to focus their presentations on the first of the UK’s arguments (ie that the bonus cap has no legal basis in the Treaty). The Judge-Rapporteur and the Advocate General both asked questions on this issue and the Advocate General asked further questions on the extra-territorial effect of the bonus cap.

Counsel for the UK maintained that CRD4 should have been enacted under the Treaty provisions concerning social policy and Article 153 in particular (rather than Article 53 of the Treaty) and would then have been subject to the exception in these provisions for matters relating to pay (Article 153(5)).

Representatives of the EU institutions (Commission, Parliament and Council) maintained that Article 53 was the correct basis for CRD4, as it related to “improved risk management and financial stability”. They argued that the bonus cap had also been introduced in relation to these issues and addressed banks in their capacity as “market stakeholders” rather than employers. Counsel for the EU further argued that even if Article 153 had been the correct basis for the bonus cap, the exception would not have applied. They argued that the exception for matters relating to pay had been interpreted narrowly by the ECJ in previous cases and that the exception applied only to fixing the level of pay (eg the minimum wage rules) and not to the bonus cap which set the ratio between fixed and variable pay. Counsel for the European Council further noted that Member States retained discretion to apply a more stringent threshold for variable remuneration, and therefore that the bonus cap only affected the structure of pay, rather than fixing it at a particular level.

The Judge-Rapporteur and the Advocate General questioned counsel for the UK on why their case only sought to annul the bonus cap provisions. They appeared to suggest that the UK government had been inconsistent in focusing its case on the cap and not on other rules which also related to pay structures (eg deferral and the clawback rules). No other judges raised any questions. However, the final ECJ decision will need to reflect the views of the majority of the Court. 

Next steps

The Advocate General announced that his Opinion would be presented on 20 November 2014. The Opinion is not binding on the Court, but will act as the springboard for its deliberations. The ECJ’s judgment is anticipated around February 2015.

The UK Government’s recent track record in front of the ECJ on its challenge to EU inspired financial regulation currently stands at “nil points” (it has lost challenges on the financial transaction tax and short selling ban in the last 12 months).

Role-Defined / fixed allowances

Certain financial institutions have already responded to the introduction of the bonus cap on variable remuneration by granting annual allowances to key individuals. The EBA is currently investigating this practice and whether treating such allowances as fixed pay is compatible with the bonus cap. Last week Commissioner Barnier urged the EBA to share the results of this investigation as soon as possible and by the end of September at the latest. He emphasised that “it is important to show a collective proactive stance on this important matter and address the claims made that the spirit – if not the letter – of Union law is being disregarded.”