The European Court of Justice (ECJ) has rejected the UK’s challenge to EU legislation that caps the level of bankers’ bonuses.
The cap restricts bonuses to 100% of banker’s pay or 200% with shareholder approval.
The UK government had challenged the legislation, asking the ECJ to consider six arguments against both the scope and legal basis for the new rules.
It had argued that the cap would drive talent out of Europe and inflate basic pay, making it harder for banks to trim costs in lean years.
The government has now withdrawn its legal challenge.
The ECJ’s Advocate General Niilo Jääskinen’s opinion found that the limit on banker bonuses was valid and did not restrict the total amount of pay so it did not amount to a cap.
He also rejected all of the government’s legal and technical arguments that the measures were disproportionate, breached privacy rights, overstepped the regulatory authority of the European Banking Authority and impaired employment contracts signed before the legislation was passed.
Jääskinen said: “Fixing the ratio of variable remuneration to basic salaries does not equate to a ‘cap on banker bonuses’, or fixing the level of pay, because there is no limit imposed on the basic salaries that the bonuses are pegged against.”
In a letter to Bank of England governor Mark Carney, Chancellor George Osborne said: “It now looks clear that there are minimal prospects for success with our legal challenge, so we will no longer pursue it.
“But that should not stop us from pursuing our objective of ensuring a system of remuneration that encourages responsibility instead of undermining it.”
A British Bankers’ Association spokesman added: “We believe that shareholders should be given powers to determine staff pay, not politicians. That’s why banks consult with investors before setting staff pay and shareholders also have the power to vote on the pay of senior bankers.
“We believe this law runs counter to recent reforms and will make the system less robust by incentivising firms to increase fixed pay. It also puts European banks at a disadvantage when competing with firms in other parts of the world.”