A plan to cap bankers' bonuses will be tested in Europe's top court after the U.K. government challenged the measure, claiming it would increase financial risks rather than reduce them.
EU policymakers are hoping to limit bonuses for any banker earning more than 500,000 euros a year. The maximum payout would be equal to annual salary or twice salary if a majority of shareholders approve.
The cap will apply globally to banks based in the EU, and to international banks operating within Europe. It could affect more than 35,000 bankers around the world, the vast majority of them in London.
The European Commission believes the cap -- introduced as part of a broader package of rules aimed at making the financial system more stable -- will reduce short-term risk taking.
But the U.K. is concerned that it will prompt banks to offer their high-flyers bigger fixed salaries to compensate for the cap, undermining initiatives already undertaken to link banker pay more closely to long-term success.
"These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers' fixed pay up rather than down, which will make banks themselves riskier rather than safer," said a U.K. Treasury spokesperson.
The U.K.'s challenge will claim that the proposal lacks proper legal grounding, fails to protect personal data, extends the power of the European Banking Authority beyond its technical brief, and should not be applied outside Europe.
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It's a risky political move for the U.K. government given residual popular anger with the huge bonuses paid to top bankers, a string of high-profile industry scandals and the squeeze in living standards felt by many in the wake of the financial crisis.
But with anti-EU sentiment on the rise, the U.K. government is seeking to reclaim some powers from Brussels and has been encouraged by signs that it may be successful with another challenge against financial regulation.
EU lawyers said earlier this month that a controversial plan by 11 countries to introduce a tax on stock and bond trading in Europe would breach the rights of countries that don't plan to adopt it.
The U.K. has been the leading critic of the move, arguing that it will push up the cost of trading, hurt jobs and growth and hit savings and pensions.