Osborne Takes Legal Action Over EU Bonus Cap

By Mark Kleinman, City Editor

George Osborne is to take legal action against Brussels over the European Union's proposed move to cap the bonuses of thousands of British-based bankers.

Sky News has learnt that Treasury officials have been considering the move for several months.

A decision to formally challenge Brussels in the courts over measures to restrict bank bonuses echoes a similar legal action launched by the Treasury in April over the EU's proposed financial transactions tax (FTT).

The details of the Treasury's complaint are unclear, although banking industry sources said they had been told that a legal challenge had been lodged by the Government with the European Court of Justice.

The move is politically risky for the Chancellor, who is likely to be portrayed by Opposition politicans as a defender of high pay for wealthy bankers at a time when Ed Miliband, the Labour leader, is positioning himself as a defender of ordinary consumers.

Mr Osborne is expected to say that the proposed cap – which would impose a ceiling on bonuses of twice the base salary of a bank employee – risks undermining the City's status as a global financial centre and the objective of creating stronger and safer banks.

He may find himself insulated from the most trenchant political attacks by virtue of the fact that his position is endorsed by independent regulators.

The Prudential Regulation Authority (PRA), an arm of the Bank of England, is also opposed to the cap, arguing that it risks increasing instability in the banking system by driving up fixed costs.

About two-thirds of those affected by the cap are said to work in the UK

British-based lenders have argued against the cap, saying that they will have little choice but to inflate basic pay if they are to compete with rivals unaffected by the new restrictions.

Andrew Bailey, the PRA's chief executive, echoed their opposition at a Treasury Select Committee hearing earlier this year.

He said that the cap would "reduce the discipline in the system but it won't reduce overall remuneration" and warned that it "will institute an unhelpful culture of banks spending their time finding ways to get around the rules".

Without a legal challenge, UK regulators have little scope to overturn or ignore the cap despite the fact that regulators and many Westminster-based politicians agree that it will be potentially counter-productive.

"There will certainly be an expression of the sentiment that the cap is likely to result in an increase in fixed costs which could expose banks to some risk when profitability is low or negative, as there would be less scope to adjust pay," said a source familiar with the PRA's thinking.

Douglas Flint, the widely-respected chairman of HSBC, has paved the way for Europe's biggest lender to increase salaries in time for the introduction of the new ceiling.

The source said the text of the consultation paper had not yet been finalised, but denied that the PRA would allow a wider array of payments, such as pension contributions, to count towards executives' base salaries when calculating the multiple allowed for bonuses.

Some senior bankers say the regulator has appeared to be receptive towards that idea during recent discussions.

The British Bankers' Association has predicted that 35,000 bank employees around the world will be affected by the cap, approximately two-thirds of whom are based in the UK.

A Treasury spokesman declined to comment.

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