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19 Nov 2014

UK's challenge to bonus cap likely to fail


Employment and employee incentives alert email

The Advocate General of the European Court of Justice ("ECJ") has today recommended that the ECJ rejects the UK Government's challenge to the cap on banker bonuses imposed by the EU.

The UK government had challenged the legislation which limits variable pay for bankers to 100% of salary (or 200% of salary if shareholder approval is given) on a number of bases. The main objection was that, in effect, it imposed a cap on total remuneration which went beyond the powers of the EU. The Advocate General has rejected this and said that the cap is lawful because it does not limit total pay, it simply limits the ratio of variable pay to fixed pay.

Whilst the Advocate General's opinion is not binding on the ECJ and the final decision is not expected until early 2015, it is likely that this opinion will be followed and that the UK's challenge to the bonus cap will fail.

All financial institutions affected by the cap will have already finalised their bonus structures for 2014 on the basis that the cap applied, with many adopting systems of "fixed" or "role-based" allowances as a response to the impact of the cap. The European Banking Authority, in a report published in October, indicated that it viewed such allowances as variable remuneration which should be subject to the cap. Given the likely failure of the challenge to the cap, the debate going forward is likely to focus on the use of such allowances rather than the validity of the cap itself.