Plans to impose a cap on bankers' bonuses have moved a step closer in the face of opposition from George Osborne.
The Chancellor told his European counterparts he could not support "the proposal currently on the table" at negotiations in Brussels, but he was firmly told the "broad majority" of the 26 other European Union nations were in favour of the new laws.
Although the proposals, which limit bonuses to a maximum of a year's salary or double that if explicitly backed by shareholders, can still be fine-tuned, the talks paved the way for a formal vote of approval by ministers next month.
Political opponents seized on the failure to block the policy, which Conservatives fear will harm the City, as an illustration of "how weak and ineffective" the British Government is in Europe.
British officials have protested that the cap on bonuses was never part of the terms of the "Capital Requirements Directive" being negotiated. Unless reversed by EU ministers, the new accord is due in force at the start of next year as another weapon in the armoury to stabilise banks against future economic shocks. Britain's claim that the move on bonuses would put EU banks at a competitive disadvantage weakened a little before the talks when Switzerland backed the idea of curbs on bankers' remuneration packages.
EU officials in Brussels, however, are speculating that the UK may try to invoke a little-used "national interest" defence to block a majority agreement. The so-called "Luxembourg Compromise" allows a member state to block a majority decision being taken if an issue is deemed to seriously affect "a very important national interest". If the plea is accepted by the others, a decision is deferred until a solution is found acceptable to all.
The Prime Minister's official spokesman said that Britain will play an "active" role over the coming weeks in discussions on how the new rules will be implemented. The spokesman told a regular Westminster media briefing: "Some progress was made. The process of discussion is going to continue over the coming weeks on how rules are implemented and we will be active in those discussions." He said that there was "a sense of understanding" among the other EU states of the UK's concerns and talks over the coming weeks will include the issue of clawback and how to incentivise a long-term approach by banks.
Treasury officials said EU ministers were warned of the "perverse effects" a cap could create, such as pushing up basic salary levels. A Treasury spokesman said: "We would like to see these addressed and there has been some progress made today. Other countries understood our position."
Shadow chancellor Ed Balls said it was "no wonder" that Mr Osborne found himself outnumbered in Brussels on "sensible" proposals to rein in bankers' bonuses.
In a blog post, Mr Balls asked: "How on earth did he get himself in this position? It shouldn't take the European Union to rein in excessive bonuses, but George Osborne has dragged his feet and refused to act in Britain. And he failed to engage with these sensible proposals to limit bonuses to a maximum of a year's salary, or double that if explicitly backed by shareholders - proposals which even his own MEPs have backed - until the very last minute. It's no wonder that in Brussels today he was outnumbered 26 to one. There should be fair rewards for performance, but it is right that there is action to rein in bloated bonuses which are a device for keeping traders focused on the weeks ahead, rather than years ahead. In the absence of action in Britain, George Osborne is on very weak ground trying to stop or unpick these proposals."