By Stephen Gilchrist
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. In this article, the author explains why he believes the EU is outside the jurisdiction of Article 153 (5) of the Lisbon Treaty.
Would you like to be told what you can earn? No? Well neither do bankers, and for that matter neither does the UK government, at least when it comes to Bankers’ bonuses. The European Union (EU) however looks at things differently. Presumably taking the view that having a pop at bankers in the current climate would be as easy as shooting fish in a barrel, with the public cheering on the sidelines, the European Parliament and the Irish government – representing all member states as holder of the EU presidency – has officially confirmed new laws capping Bankers’ bonuses to twice their basic salaries across Europe. These rules will come into force at the start of 2014, despite fierce opposition to the move from the UK government. Under the terms of the proposals, bonuses will be restricted to 100% of a banker’s salary from January next year. However, they can be as high as 200% of salary if shareholders approve. Approval will need the votes of at least 65% of shareholders owning half the shares represented, or of 75% of the votes if there is no quorum and if a ratio of more than one times fixed remuneration is approved by shareholders, 25% of the variable remuneration must be paid in long-term deferred instruments. The deferral period for such instruments must be a minimum of five years.
Chancellor George Osborne, who saw the cap as an attack on the City of London, was the only one of 27 finance ministers to refuse to sign up. Osborne argued that limiting bonuses would have the ‘perverse effect’ of causing a sharp rise in bankers’ salaries and make it more difficult to claw back undeserved bonuses. Attacking the European Union proposals, the London Mayor Boris Johnson said: “This is a vengeful and self-defeating attempt to pick on London. We don’t try to cap the pay of oil executives or football players. I can see why people rage about what happened with the banks but this is an attempt to knock London off its perch and we’re not going to let it happen.” Ever ready to pitch in, Bank of England Governor Sir Mervyn, warned that the cap could damage financial stability and set banking reform back years and claimed that capping bonuses would lead to higher salaries, which would be paid in cash and could not be clawed back.
In the European Union 18 out of 27 member states currently have national minimum wages but even the EU leaves such decision making to sovereign national states and does not impose an EU wide wage or formula. But here they are seeking to limit remuneration. How can this be? Leaving pay alone may have something to do with Article 153 (5) of the Treaty on the functioning of the European Union which originated as the ‘Rome Treaty’ in 1958 and was repackaged by the ‘Mastricht Treaty’ in 1993 and on the entry into force of the Treaty of Lisbon in 2009. In the preamble to the original treaty one of the objectives is ‘affirming’ as the essential objective of their efforts the constant improvements of the living and working conditions of their peoples.
Which brings me back to Article 153(5), which is part of Title X of the treaty denominated ‘Social Policy’. The objective of Title X is ‘the promotion of employment, improved living and working conditions, so as to make possible their harmonisation while the improvement is being maintained, proper social protection, dialogue between management and labour, the development of human resources with a view to lasting high employment and the combating of exclusion’, and Article 153 provides that the EU Parliament and Council can adopt measures to support workers rights and conditions of employment. Except that Article 153(5) also says that ‘The provisions of this Article shall not apply to pay, the right of association, the right to strike or the right to impose lock-outs’.
So how is it that the EU can seemingly ride roughshod over the provisions of a treaty that delineates its own jurisdiction? In fact Article 157 (formerly Article 119 of the Treaty of the European Community), which deals with equal pay, was litigated by the European Court of Justice (ECJ). A woman named Gabrielle Defrenne worked as a flight attendant for the (now bankrupt) airline Sabena. The airline paid her less than her male colleagues who did the same work. Ms Defrenne complained that this violated her right to equal treatment on grounds of gender under article 119. The subsequent 1978 case held that the scope of article 119 did not extend beyond equal pay, but that the elimination of sex discrimination was a fundamental principle of Community law. In other words, (I would suggest) by extension the Social Policy objectives of the Treaty were concerned with improving workers’ rights and not limiting them. 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. The EU argues that the cap is not directly affecting pay, it is just setting a ratio between pay and bonus but in the view of this writer, it is outside the jurisdiction of the EU – generally governments don’t interfere with private industry remuneration arrangements, except where there are matters of principle intended to protect employees.
It is reported that some banks are considering a legal challenge to the bonus cap, with legal advice prepared by Shearman & Sterling understood to suggest the proposed bonus cap contravenes EU law. The advice is also understood to claim that the bonus cap may violate the constitutions of Member States such as Austria, Germany and Poland (although the finance ministers of these countries all voted for the cap). On the other hand Stuart Cakebread, a barrister at Selborne Chambers in London has said: “In my view the EU does have the power to cap bonuses under CRD IV. 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.” CRD 1V- introduced by the European Commission has the objective of enhancing and strengthening the quality of bank capital.
If, by this time, you think that you need a wet towel wrapped round your head, don’t worry. It is unlikely that the EU directive will be tested unless a consortium of banks decide to litigate the case before the European Court of Justice. Or in the case of an alleged violation of a national constitution the 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. Don’t be surprised if you hear nothing about any such litigation. Some lawyers say they do not expect banking clients to put their heads above the parapet and challenge the European Union in Luxembourg’s European Court of Justice, partly because a previous attempt ultimately foundered. The ECJ held that the EU was acting ultra vires, or beyond its powers, in 2001 and annulled a directive imposing a blanket ban on tobacco advertising and sponsorship across the EU. However, the court also suggested minor changes that later allowed a slightly watered down ban to be passed in 2005. In other words, even if the bonus cap is struck down the ECJ itself may suggest a formula which would legalise it.
Then of course there is the public relations angle. Bankers are not the flavour of the month. Are bankers going to put their heads above the parapet to take the EU to court? No-one has yet started the process, and this writer is not convinced that the banks have the will to litigate. Doubtless, creative accountants are already hard at work devising a system of variable pay which does not conflict with the Directive. Finding alternative compensation structures to get around the rules will, no doubt, become a full-time occupation by banks and their lawyers. In 2010 the ECJ supported an EU cap on mobile phone roaming charges, rejecting a legal challenge by four mobile phone companies. Do not expect the same in 2013 in regard to banker’s remuneration.
This article was originally published in Credit Control Journal, Volume 34, Number 3, February 2013