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Osborne drops banker bonus cap bid

Chancellor George Osborne has dropped his attempt to challenge an EU cap on banker bonuses, after it was dismissed by the legal adviser to the European Court of Justice.

The UK argues that the rules limiting pay-outs to no more than 200% of basic salary encourage the banks to raise fixed pay instead, increasing their business risks.

But Advocate General Niilo Jaaskinen has now delivered an opinion that "all the UK's pleas should be rejected and that the Court of Justice dismiss the action". The court was expected to deliver its ruling next spring.

Mr Osborne conceded defeat in a letter to Bank of England governor Mark Carney, saying: "It now looks clear that there are minimal prospects for success with our legal challenge so we will no longer pursue it."

But he added: "That should not stop us from pursuing our objective of ensuring a system of remuneration that encourages responsibility instead of undermining it."

In his letter, Mr Osborne said he was "concerned" at the trend for bankers to receive a growing proportion of their pay in fixed salaries.

"This trend is bad for financial stability and bad for rebuilding trust in the financial system," said the Chancellor.

"Fixed remuneration cannot easily be cut when a bank faces financial distress, nor can it currently be made subject to clawback in cases of serious misconduct."

The bonus cap meant that a greater proportion of bankers' earnings was "not subject to clawback and effectively guaranteed even if the bank is facing financial distress", he said.

The EU measure means that bankers cannot be paid bonuses of more than 100% of annual salary - or 200% if national governments decide to allow firms to increase them to this level.

But Mr Jaaskinen said it was not a "cap" since it was linked to a banker's salary, on which there is no limit to what a bank can pay.

The measure was adopted last year, prompted by concerns that the scale of banker bonuses was one of the major contributors to the 2008 financial crisis resulting in a series of state bail-outs for firms such as Royal Bank of Scotland and Lloyds.

It was argued that the large bonus pay-outs in relation to salaries encouraged excessive risk-taking by bank employees in order to share in short-term profits but not in the cost of failures which in the most serious cases were borne by taxpayers.

The Bank of England set out plans earlier this year to allow bonuses to be clawed back up to seven years after being paid.

But in a speech this week, Mr Carney said it was "unfortunate" that the EU bonus cap had the "undesirable side-effect of limiting the scope for remuneration to be cut back".

Mr Carney said new rules to put fixed pay at risk may now be needed, backing an idea that some staff could be paid in "performance bonds" instead of cash.

Since the EU proposals were announced, attention has switched to a new form of allowance pay for bankers, though the European Banking Authority (EBA) recently decided that these were against the new rules.

Last month, Bank of England deputy governor Andrew Bailey, who is head of the PRA, broke with protocol to reveal that he voted against the decision after the EBA incorrectly announced that it had been unanimous.

Earlier this year, state-backed Royal Bank of Scotland was blocked from paying bonuses twice the size of salaries after its plans were vetoed by the Government.

RBS said the limit exposed it to "commercial and prudential risk" as it tried to compete with bigger-spending rivals.

Cathy Jamieson, shadow financial secretary to the Treasury, said: "While working people face a cost-of-living crisis and lending to business is falling, it's astonishing that George Osborne's priority has been to spend taxpayers' money fighting a cap on bankers' bonuses.

"It shouldn't have taken the EU to act to rein in excessive bonuses, but there has simply been no action from the Chancellor here in Britain."

Ukip leader Nigel Farage said was "quite sensible of George Osborne to drop his legal challenge against the EU", adding: "We always seem to lose anyway."

Shadow chancellor Ed Balls said: "This is a humiliating climbdown by George Osborne, which he has tried to sneak out under the cover of the Rochester and Strood by-election.

"The Chancellor revealed his true priorities when he decided a year ago to spend taxpayers' money fighting a bank bonus cap while working families face a cost-of-living crisis. He should tell taxpayers how much money he has now wasted on this challenge, which we warned him against.

"Labour will reform the banks and levy a tax on bank bonuses to fund a paid starter job for young people out of work for over a year."

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