Confusion over legality of bonus caps
Stephen Gilchrist's comments published in the International Financing Review
IFR 1976 23 March to 29 March 2013 by Sandrine Bradley
Lawyers are divided over whether bonus capping contravenes European treaties despite clauses in them being hailed as an escape route for bankers due to suffer a cut in variable pay.
Article 153 (5) of the Lisbon Treaty states that EU social policies to protect workers' rights does not apply to pay, with some lawyers arguing that this could form a legitimate platform for banks to challenge the new rules that will see bonuses capped at one times salary.
"The way article 153 is phased is terribly bland and everyone is using it to try to find ways of getting around the bonus capping," said Stephen Gilchrist, head of regulatory law at Saunders Law.
"The EU is arguing that the cap is not directly affecting pay, it is just setting a ratio between pay and bonus," he said. "But I think it is outside the jurisdiction of the EU - generally governments don't interfere with private industry remuneration arrangements, except where they are a matter of principle to protect employees under this article 153."
A consortium of banks or bankers could directly challenge the competency of the EU to pass this legislation through the European Court of Justice.
According to one Brussels-based lawyer the legislation may also violate the constitutions of some member states, such as Austria, Germany and Poland, despite these countries' MEPs voting in favour of the bonus capping.
In these cases banks could challenge the constitutional basis of the caps through their national courts. The latter could then hold a judicial review before referring it to the ECJ as a preliminary reference question.
But other lawyers remain sceptical that there is a sustainable legal challenge available based on the Lisbon Treaty.
"In my view the EU does have the power to cap bonuses under CRD IV," said Stuart Cakebread, a barrister at Selborne Chambers in London. "Article 153 (5) is irrelevant as it is concerned with social policy, for example protecting workers' rights. Capping bonuses is not protecting workers' rights and so any powers or limitation on powers that Article 153 provides can neither provide for nor limit the EU's powers to cap bonuses under CRD IV."
Another London-based lawyer disagreed. "It is not as clear. If 153 does not apply at all, then on that basis the EU would have the power to set pay," he said. "But the EU has said itself it has no powers to set pay."
In the meantime banks' reaction to the news they could potentially challenge the controversial proposals has been lacklustre.
"There is a political element: are bankers going to put their heads above the parapet to take the EU to court?" asked Gilchrist. "No-one has started the process, I am not sure banks have the will to litigate."
Dean Fuller, senior associate at city law firm Fox agreed. "The banks' response to the possibility that they can fight this proposal has been pathetic. There has been a deafening silence," he said.
However, others argue that the relative failure of similar challenges brought against EU legislation, such as a ban on tobacco advertising and the cap on mobile phone roaming charges, could indicate that any challenge will be met with limited success, and at best deliver just a diluted version of the capping.
In addition no official challenge can be mounted until the EU bonus legislation is actually finalised, which will not happen for at least another month.
Instead headhunters say that banks are looking at ways to get around the bonus cap once it does get implemented.
"Finding alternative compensation structures to get around the rules will become a full-time occupation by banks and their lawyers," said the chairman of one London-based recruitment firm.