Brussels, 20/11/2014 (Agence Europe) - EU legislation limiting the ratio of bankers bonuses compared to their basic salary is valid, in the opinion put by Advocate General Niilo Jaaskinen to the Court of Justice of the EU on Thursday 20 November. He considers that the United Kingdom's action should be rejected.
Legal context. In 2013, the EU toughened the prudential rules for banks (CRD IV package). Among the measures of the package were rules on the calculation of the remuneration by financial institutions of top managers and traders. Seen as one of the factors that pushed the world into a financial crisis unprecedented since 1929, with the effects still being felt today, the remuneration targeted is made up of a fixed salary plus a variable “bonus” paid to bankers whose professional activities impact on the risk profile of their financial institutions.
The CRD IV package contains a directive (2013/36/EU) which imposes a set ratio between the basic salary and the bonus. The directive stipulates that bonuses cannot be paid in excess of 100% of basic salary, or 200% if member states decide to confer this power on shareholders, owners or members of these financial institutions. It is for the European Banking Authority (EBA) to draft regulatory technical standards specifying the criteria used to identify individuals who fall within the scope of the directive (see EUROPE 11177). The package also has a regulation which calls for compulsory disclosure by financial institutions of the ratio outlined in the directive, and the number of individuals being remunerated over a certain threshold. It also requires that these institutions disclose information about the total remuneration of each member of their management body or senior management should this be requested by the member state or the competent authority.
UK action. The United Kingdom brought an action to have such provisions annulled. Firstly, it argued that the legal framework used for the directive (freedom of establishment and freedom to provide services) was incorrect as the issue of remuneration relates to social policy on which the member states alone are competent. The CRD IV package, the UK argued, infringes the subsidiary principle and is disproportionate. Neither does it guarantee sufficient legal certainty for bankers' contracts signed before the new European measures come into force and it confers excessive powers on the EBA. The final argument advanced by London was that the requirement to disclose remuneration levels infringes the right to privacy and data protection rules.
Advocate General's response. Jaaskinen's opinion delivers but one response to the British action as a whole: the Court should reject it. Firstly, the choice of the legal framework for the CRD IV package is in line with Court case-law from 1997 (case C-233/94) which holds that Community law does not preclude measures that restrict freedom of establishment and freedom to provide services as long as these measures aim at promoting the harmonious development of the activities of credit institutions, while increasing the stability of the banking system and the protection of savers. Since the bonuses awarded by financial establishments are a factor that can affect financial stability, as the 2008 crisis demonstrated, it is legitimate for the EU to impose rules for those establishments which wish to have access to the internal market. While rules on wages are unquestionably a matter solely for the member states, fixing the ratio of variable remuneration to basic salaries does not equate to a “cap on bankers' bonuses” since there is no limit imposed on the basic salaries against which bonuses are pegged.
As for the disclosure of the remuneration levels of members of the management body or senior management, application of this requirement is entirely a matter for national authorities, which have to comply with EU data protection and privacy legislation. Furthermore, the financial institution may challenge the legality of any decision before the appropriate judicial authority.
Jaaskinen is also at a loss to see where the alleged excessive EBA powers are to be found. The powers delegated to the EBA only relate to non-essential technical elements. The EBA is merely empowered to elaborate non-binding draft measures which cannot pass into law unless they are thereafter adopted by the Commission. As to the legal uncertainty affecting pre-CRD IV remuneration contracts, the Advocate General finds it hard to believe that the financial institutions did not have sufficient time to bring them into line with the new rules.
Finally, the UK's claim that the contested provisions infringe the principles of proportionality and subsidiarity are rejected by Jaaskinen with the affirmation that the objective of creating a uniform regulatory framework of risk management could not have been better achieved by national governments as opposed to the EU. (JK)