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The UK government is challenging the rules on pay in the banking sector in the
Court of Justice of the European Union (CJEU) stating they are not fit for
purpose and will undermine stability in the banking system. Kennedy Masterton-Smith of Norton Rose Fulbright comments on the implications of the challenge to the Capital Requirements Directive IV (CRD4).
FCA and PRA examine legitimacy of stripping bankers of their outstanding bonuses
Financial Times, 8 October 2013: The Financial Conduct Authority(FCA) and the Prudential Regulation Authority are to investigate whether cancelling bankers' outstanding bonuses if their bank is the subject of a government bailout would breach their human rights.
EU courts back UK stance on short selling
Financial Times, 13 September 2013: The advocate-general’s (AG) advice to the Court of Justice of the European Union has sided with the UK and favoured stripping the European Securities and Markets Authority of its power to ban short selling in emergencies. Although the opinion is non-binding, usually the court's judges concur with the AG.
Why does the UK feel the need to resort to legal challenge?
The government announced on 25 September 2013 it had lodged a legal challenge with the CJEU on new EU rules on pay in the banking sector, which are contained within new EU legislation governing the amount and types of capital that banks must hold. The legislation is referred to as CRD IV, the name given collectively to EU Regulation No 575/2013 (known as the Capital Requirement Regulations) and Directive 2013/36/EU (known as the CRD IV Directive).
This latest challenge follows the government’s challenges to the Short Selling Regulation (EU) 236/2012 and the Financial Transactions Tax (FTT), although the government’s recent success in relation to the Short Selling Regulation is not necessarily an indicator of success. However, the recent challenges to the CJEU do reflect a willingness to challenge decisions that go against the UK during the legislative process.
As has been widely publicised, as well as containing rules on regulatory capital, CRD IV contains a provision which seeks to limit the bonuses that can be paid to certain individuals in an investment firm or bank to 100%. This limit can be increased to 200% where shareholder approval is obtained.
On what basis are these challenges being made?
The government’s position is that the ‘bonus cap’ under CRD IV, which it feels was introduced without any assessment of its impact or supporting evidence, will undermine the significant progress that has been made to implement pay practices that support financial stability. This is on the basis that an increase in salaries will have a direct impact on the stability of financial institutions as they provide no flexibility for those years where a firm may have underperformed.
The government is also seeking to challenge the legality of the powers delegated to the European Banking Authority (EBA), which it believes goes well beyond its remit of setting technical standards.
The background to this issue appears to relate to the EBA’s draft regulatory technical standards, which seek to define which individuals will be caught within the scope of the new rules in order to create a more level playing field across Europe.
The current draft standards will greatly expand the group of individuals that are caught within a firm or financial services group. This is of particular concern to UK firms as we understand that the proposed rules will apply to staff of UK entities outside the UK.
How do the EU proposals in these areas compare with the UK’s own rules?
The rules under CRD IV are due to be implemented on 1 January 2014 and will affect bonuses paid in respect of services provided from that date. For example, where a firm has a calendar performance period, bonuses paid in the spring of 2015 in respect of services provided during 2014 will need to comply with the new rules.
The FCA and the government have both acknowledged that the UK’s obligations under European law are such that CRD IV will still need to be implemented despite this challenge. The UK’s legal challenge in the CJEU may take approximately 18 months to determine so it may be that a conclusion on the question of the bonus cap is reached prior to the payment of the 2015 bonuses.
If the EU pushes ahead with new rules in each of these areas, what options will be available to the UK?
In August 2013, the FCA published its latest consultation paper on the application of the CRD IV remuneration rules to investment firms and has confirmed that it will proceed to transpose the legal minimum of the CRD IV provisions on the limits on bonuses. However, dependent upon any subsequent ruling from the CJEU, the FCA may need to consider any necessary amendments to its rules in due course. As such, the FCA has stated that it intends to apply the bonus cap proportionately. In general terms, firms with assets exceeding £15bn will be expected to apply the bonus cap.
This was first published as a News Analysis piece in LexisPSL Financial Services. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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