UK challenges EU bonus cap but says it will still be implemented next year

The UK Government has launched a legal challenge in the European Court of Justice to the EU’s new rules on bonuses in the financial sector. The rules, contained in the Capital Requirements Directive IV (CRD IV), include limiting the variable remuneration that those affected by the rules may be paid to no more than one time’s salary - although with express shareholder approval, variable remuneration of up to two times salary may be paid. The Government has said that it fears the new rules “will undermine responsibility in the banking system rather than promote it”.

Interestingly, the Treasury’s press release states that the UK will still implement the cap in order to comply with its obligations under EU law. This provides some challenges for firms which must comply with the new rules while knowing that the Government is in the process of challenging them.

The remunerations provisions of CRD IV are to apply to credit institutions and investment firms in the UK (that is, firms which fall within the scope of the Markets in Financial Instruments Directive (MiFID)) through changes to the Remuneration Code. Both the FCA and the PRA have started consulting on these changes, although further consultation is still expected. The cap is due to come into effect on 1 January 2014 and will apply to variable remuneration which relates to performance on or after that date. It is expected that there will be transitional provisions. Larger firms will only be able to avoid implementing the cap if the Government’s challenge is successful and the cap is therefore not implemented, at least not in the UK. However, smaller firms will remain hopeful that, even if the cap is implemented, they can rely on proportionality to argue that they do not fall within the scope of the rules.

It is understood that the FCA and the PRA will issue guidance as to how firms affected by CRD IV should proceed with their remuneration planning in the coming weeks.

Click here to see the Government’s press release on its bonus cap challenge, here to see the PRA’s current proposals and here to see the FCA’s current proposals, though both may shortly be updated.