Yesterday the ECJ released Advocate General Jääskinen’s opinion on the UK government’s challenge to the Bonus Cap. The Bonus Cap provides by Articles 92 to 94 of the CRD IV Directive, and implemented by the UK regulators within SYSC 19A, that certain bankers’ bonuses may not be more half their total pay, or two-thirds with shareholder approval.
AG Jääskinen, as widely expected, found the Bonus Cap to be lawful. It was, however, a closer-run thing than the press release suggested (which for most of yesterday was the only document available; the actual opinion not having been released). The AG noted that the UK government’s arguments had “varying degrees of merit“, with one point in particular “providing the most cogent reasons for questioning the validity of the measures impugned” (para 118). That argument is that Article 153(5) TFEU, as interpreted by the ECJ, precludes the EU adopting measures that regulate the level of pay that workers receive.
However, the AG’s view is that “the rules set up through Articles 92 to 94 of the CRD IV Directive can, at most, be viewed as having a link with pay, while the Council adds that the amount of the fixed component is left to the remuneration negotiation between the staff and the financial institution“. Consequently, there is no limit on the total pay that may be awarded, and so the AG took the view that the Bonus Cap is lawful. There is, however, scope for argument about that. If the Bonus Cap were properly adhered to, some argue, the Bonus Cap would tend to limit overall pay because historically a very large proportion of bankers’ pay has been by way of bonus.
The legal niceties were, however, overtaken by events. Dramatically, upon receiving the AG’s opinion, George Osborne (UK Chancellor of the Exchequer) decided to abandon the challenge to the Bonus Cap. See here. Notably, Mr Osborne then wrote to the Governor of the Bank of England, Mark Carney. In that letter, Mr Osborne notes that the response to the Bonus Cap has been to push up fixed remuneration, which is not subject to the malus and clawback rules that apply to variable remuneration. Consequently, Mr Osborne states that “I believe there is a need for careful consideration of how, in jurisdictions such as the EU where the balance of banking remuneration has shifted towards fixed remuneration, compensation schemes can still achieve the objective of supporting sound risk taking“. In other words, the regulators need to consider how fixed pay can be controlled, which was exactly the issue that Mark Carney discussed earlier this week in his speech to the Monetary Authority of Singapore.
What would control of fixed remuneration look like? Mr Osborne’s letter states that he was ‘interested’ in the ideas floated by President William Dudley of the New York Federal Reserve regarding ‘performance bonds’. Those ‘bonds’ would be forfeited were fines to be imposed on a bank by a regulator, so that senior bankers bear the brunt of those fines rather than shareholders. The proposal would be to treat such bonds as part of the fixed pay of senior bankers. Mr Osborne, I note, was very keen for such proposals to be developed through the Financial Stability Board, of which Mr Carney is chair, so as to ensure that there is coordinated international action, rather than the UK acting alone. We await the proposals with interest.
Tom Ogg