Thursday, September 28, 2023
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EU May Limit Banker Bonuses, Adviser Says

(CN) - The EU can legally limit bank executives' bonuses to a ratio of their base salaries, an adviser to the European Court of Justice held Thursday.

In the wake of the 2008 global financial meltdown, EU lawmakers adopted a broad range of measures designed to enhance the regulation and stability of the banking industry.

Recognizing that huge bonuses for bank employees led to the excessive risk-taking that in some cases cost taxpayers billions when banks failed, legislators from both the European Council and Parliament passed a directive to regulate bankers' bonuses.

The law limits bonuses in the banking industry to 100 percent of the base salaries of high-ranking employees, or 200 percent if member states allow bank shareholders, members or owners to set the bonuses.

Lawmakers tasked the European Banking Authority with deciding who the law applies to, and required banks to disclose publicly who receives bonuses and how much the bonuses are.

The United Kingdom sued to overturn the law, arguing that it infringed on the EU's constitutional principles of freedom of establishment and freedom to provide services. Britain also claimed the directive broke key EU standards of proportionality, gave the EBA too much authority and violated the privacy of executives whose salary and bonus information would be made public.

But in an opinion for the EU high court released Thursday, Advocate General Niilo Jaaskinen advised his colleagues to dismiss the U.K.'s challenge in full.

Jaaskinen noted that the high court has held several times that laws aimed at stabilizing the banking industry trump any restrictions on the freedoms of establishment or to provide services. And given that high bonuses can affect the risk profile of banks - potentially undermining their stability - they can be constitutionally limited, the adviser said.

The advocate general agreed that determining pay falls within the authority of member states. But the law in question does not limit how much banks pay their employees - only the ratio of bonus to salary - so there is no "capping" effect as the U.K. suggested, Jaaskinen said.

As to whether the directive gives the EBA too much power, the adviser said that all of its decisions are nonbinding until approved by the European Commission - the regulatory and administrative arm of the EU. Therefore, any proposal made by the EBA has no direct effect on individuals until the commission makes it law.

Jaaskinen also advised his colleagues to reject Britain's concerns that the directive affects existing employment contracts, noting that banks have known for years that changes to their bonus systems were coming and could have wrote the current contracts accordingly.

Finally, the adviser expressed doubts that member-state authorities could do a better job of creating a uniform regulatory framework for risk management in the banking sector than EU lawmakers had through the directive.

Jaaskinen's opinion - which is not binding on the Court of Justice - had not been made available at press time.

The high court has begun its own deliberations in the case, and its judgment will be issued at a later date.

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