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Following the global financial crisis in 2008, the EU adopted a broad range of measures designed to enhance the regulation and stability of its financial institutions. During the discussions surrounding the adoption of these measures it was considered that the design of the remuneration schemes within these institutions was one of the major contributors to the crisis. Often involving sizeable bonus pay-outs in comparison to salaries, this encouraged employees to engage in excessive risk taking in order to share in the banks’ short term profits, but not in the cost of their failures which, in the most serious cases, were borne by the taxpayer. The ”Capital Requirements” package of legislation adopted in 2013 by the Council and the Parliament (known as the CRD IV Package and composed of a Directive1 and a Regulation2) therefore included a series of measures to regulate this matter.
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The United Kingdom brought an action asking the Court to annul these particular provisions of the directive and regulation. The UK believes that the measures fixing the ratio of variable to fixed remuneration could not be adopted using the Treaty provisions concerning the freedom of establishment and the freedom to provide services (Article 53(1) TFEU) but fall within the realm of social policy and as such within the competence of the Member States. The UK also argues that the provisions infringe the principles of proportionality and subsidiarity, that the directive violates the principle of legal certainty, that the conferral of powers to the EBA is illegal, and that the regulation’s measures requiring disclosure of remuneration infringes the right to privacy and data protection rules.
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In his Opinion November 20, Advocate General Niilo Jääskinen suggests that all the UK’s pleas should be rejected and that the Court of Justice dismiss the action.
As regards the principal argument of the UK, that the measures were adopted using an incorrect legal basis, the Advocate General notes that the Court has already held that measures aimed at promoting the harmonious development of the activities of credit institutions throughout the EU by eliminating any restrictions on freedom of establishment and freedom to provide services, while increasing the stability of the banking system and the protection of savers, can be based on Article 53(1) TFEU.3 Given that the variable component of remuneration impacts directly on the risk profile of financial institutions, it can affect the stability of financial institutions who can operate freely across the EU, and in consequence that of the financial markets of the EU. As such, the measures challenged by the UK are related to the conditions of access to and pursuit of activities of financial institutions in the internal market.
As to whether these measures should be considered to fall within the realm of social policy, the Advocate General accepts that the determination of the level of pay is unquestionably a matter for the Member States. However, fixing the ratio of variable remuneration to basic salaries does not equate to a “cap on bankers bonuses”, or fixing the level of pay, because there is no limit imposed on the basic salaries that the bonuses are pegged against. The 100% ratio introduced by the legislation can attach to any sum of money that a bank is prepared to pay by way of fixed salary. The fact that this ratio can be increased to 200% or fixed at a rate lower than 100% by the Member States underscores the absence of any “capping” effect. As there is no legal limit to the basic salary that can be paid there is no limit to the total level of pay.