Capping bankers' bonuses: a step too far for the EU?

Steve Peers

Bankers are never going to win a popularity contest. The collapse of international financial markets which started in 2008 and has led to austerity across Europe has been widely blamed on lax regulation of banks and irresponsible behaviour by bankers. It has led to a huge overhaul of EU banking regulation, including the transfer of banking supervision to the European Central Bank, new rules on bank bail-outs, and provision for criminal law sanctions against bankers involved in market abuse (discussed here). EU law has gone further still, and adopted rules which cap the amount of bonuses paid to bankers.

The United Kingdom, home to the biggest financial services industry in the EU, has had reservations about some of these new laws. It has opted out of some of them (the market abuse rules, the banking supervision rules and aspects of the bank bail-out rules), and has challenged others in the CJEU. Earlier this year, its challenge to the ban on ‘short-selling’ failed in the Court (see discussion here), and today’s Advocate-General’s opinion suggests that its challenge to the restrictions on bankers’ bonuses should fail too.

These restrictions are found in the EU’s revised rules on capital requirements and the authorisation to take up banking services, which are set out in a parallel Regulation and Directiveadopted in 2013. In effect, they require that bankers’ bonuses cannot usually be more than the amount of their ordinary annual salary. By way of exception, the bonuses can be double the amount of the banker’s ordinary annual salary, if bank shareholders agree pursuant to a special procedure.

Advocate-General’s Opinion

The UK raised six main complaints against the bonuses rules: lack of competence by the EU to regulate pay; infringement of the principles of subsidiarity and proportionality; violation of the principle of legal certainty; illegal delegation of power to an EU agency (the European Banking Authority); breach of EU rules on data protection and privacy, due to the potential disclosure of the pay received by bankers; and a breach of the principles of customary international law, due to the extraterritorial effect of the rules. Advocate-General Jaaskinen argues that all five complaints be rejected.

First of all, the Advocate-General argues that Article 53 TFEU (the legal base for this measure) is correct, because that legal base can extend to banking regulation generally, not just the promotion of the freedom of establishment for banks. The pay cap does not constitute a ‘social policy’ measure, since it does not regulate the basic salary paid to bankers, which is the basis for calculating any additional bonus.

Secondly, data protection rules are not violated, because the disclosure of bankers’ pay is only discretionary, not mandatory. In the event that Member States make a request for such disclosure, they would then be bound by EU data protection law.

Thirdly, conferring powers upon the EU agency is not illegal, because the powers do not concern the essential elements of the legislation, and the EU Banking Authority does not adopt the measures itself, but merely recommends their adoption to the Commission.  Fourthly, the principle of legal certainty is not infringed by applying the new rules to pre-existing employment contracts. Fifthly, the principles of proportionality and subsidiarity are not violated, because the creation of a uniform system of risk management was better achieved at EU level, rather than national level, and the EU institutions have great discretion to assess how these principles apply. Finally, the UK has not made out its argument that customary international law rules out the extraterritorial application of such limits.

Comments

This case is not about whether limiting bankers’ bonuses is a good idea. Rather it concerns whether it is legal for the EU to limit them. If the EU lacks such power, there would in principle nothing to prevent Member States from limiting bankers’ bonuses individually, if they wished. The argument about whether to do so would then be held at a national level, rather than the EU level.

Some of the UK’s complaints are clearly unconvincing.  As the Advocate-General suggests, the argument about international law is not fully fleshed out or convincing. The legal certainty argument fails to consider that employment law regulation usually impacts upon existing contracts; this is justifiable in light of the public-interest principles underlying the very nature of employment law. Anyway, bonuses are inherently variable. As for the data protection argument, the Opinion largely follows what the CJEU established already in EP v Council (family reunion): if EU law provides for options for Member States, the compatibility of those options with human rights law should be judged when and if Member States exercise those options. In any event, prior case law on data protection and salary disclosure does not set out an absolute ban on release (see Satamedia, for instance).

The UK’s other arguments are rather stronger. While it is true to say that the EU’s banking agency does not actually take the final decision relating to implementation of the bonus cap, it does more than simply provide expert advice on this issue. The Commission must then either act on this advice or do nothing at all: so it does not have full discretion to adopt the delegated acts (see the complex decision-making system set up by the Regulation establishing the Banking Authority). This process is fundamentally questionable because it blurs the accountability for the decision being taken (and moreover, it is too convoluted to be transparent).   

As for proportionality and subsidiarity, certainly the events of the last six years have demonstrably indicated that a more decentralised system of managing banking risks was ineffective. Hopefully the EU-wide measures will be more successful, but in any event the nature of the subject-matter calls for an EU-wide response, in light of the level of integration between European financial markets and the potential cross-border impact of bank failures. But that isn’t the point: the UK is not challenging the entirety of the capital requirements rules, but only some of the handful of provisions which regulate bankers’ bonuses. In fact, it is not challenging those provisions which prevent bankers from receiving bonuses as a consequence of risky behaviour, but only those provisions which regulate bonuses regardless of bankers’ actions. So the opinion should instead have asked whether theseprovisions meet the requirements of the subsidiarity principle. It is hard to see how they do.

This brings us to the biggest problem with the Opinion: the argument that the legal base on freedom of establishment can regulate bankers’ bonuses. The legal base point here can only be understood by viewing the Treaty as a whole. It has separate provisions on social policy, which include a ban on EU regulation of pay (Article 153 TFEU). The general internal market power (Article 114 TFEU) specifically states that it ‘shall not apply to’ measures ‘relating to the rights and interests of employed persons’. The Treaty drafters’ intention was clearly to provide for lex specialis rules relating to regulation of pay.

The ban on EU regulation of pay has been clarified in the case-law of the CJEU. In the Impact judgment, for instance, it ruled that the EU could not regulate the level or components of pay, but it could establish non-discrimination rules relating to pay as regards categories of workers. Similarly, the working time directive provides for holiday pay, but does not regulate the level or components of pay which a worker normally receives (which then constitute the basis on which the holiday pay is calculated).

Following the logic of these precedents, it is true to say that the capital requirements legislation does not set the level of bankers’ pay, on the basis of which the bonuses are capped. But it does regulate the components of pay, by determining how much of the total amount of pay can be variable. The Advocate-General’s reasoning would mean that the EU would be free to regulate at least some aspects of workers’ pay in any area of law subject to special rules in the Treaty, rather than the general internal market legal base. So the EU could regulate aspects of the pay of farmers, fishermen, transport workers and anyone in other service industries.

It could reasonably be argued that aspects of pay in these other fields can exceptionally be regulated by EU law where that is an essential component of the regulatory framework. This could be the case in banking, for instance if the overall amount of pay could damage the existence of the bank or bonuses were linked to risky behaviour. The legislation does have rules on these issues, but the UK has not challenged them. So it follows that the opinion is fundamentally unconvincing on the legal base point.

In light of the financial crisis, there are many good reasons to regulate banks more effectively, and it would not be shocking if Member Stateswanted to react to understandable public anger at the huge cost of bank bail-outs by limiting bankers’ income. But resentment at bankers’ pay, even it is entirely justified, cannot authorise the EU to exercise powers which any reasonable interpretation of the Treaties suggests that it just does not have.


Postscript (November 21st): Like any Advocate-General's opinion, this view is non-binding, although a number of British journalists and politicians forgot this when the opinion was released. In any event, the point is moot since, following publication of the opinion, the UK's Chancellor decided to drop the legal challenge. His official reason was to save taxpayers' money, but this is not convincing since a large majority of the legal fees will surely already have been incurred, and there is still a chance to get them reimbursed if the UK wins the case. A victory for the UK would have not have been improbable, given that the CJEU did not follow this Advocate-General's views in the last major banking law case (concerning the ban on short-selling), and that the analysis of the legal basis point is not very convincing. 

 

Barnard & Peers: chapter 14, chapter 19

 

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Beyond austerity: the future of EU employment law

Professor Catherine Barnard, Trinity College Cambridge

If the critics are right, the EU social model is dead. Those on the right may well be dancing on its grave; those more sympathetic might mourn its passing. My view is more sanguine. Yes, the European social model (ESM) is certainly facing unprecedented challenges. However, I will suggest that these challenges, caused in part by the EU’s response to the crisis but more generally resulting from a growing hostility towards the European Union project as a whole, are not terminal and that there is – and should be - a continued role for the European social model. The EU’s history demonstrates that the ESM has, in fact, a long-standing ability to regenerate and resurrect itself. In this blog post, I would like to consider the future.

Vandenbroucke and Vanhercke argue that ‘Europe needs a Social Union that can support national welfare states on a systemic level in key functions such as macroeconomic stabilisation, and also guide the development of national welfare states on the basis of general social standards and objectives.’ [1] For the eurozone states this may indeed be the best and necessary solution. However, I want to focus on an agenda which might hold some appeal to an EU of 28, or at least a combination of both Eurozone and non-Eurozone states and this inevitably focuses on the narrower domain of employment law. And my discussion is tempered by political reality. 

Social compact

First, I would call for the creation of a European Social Compact to match the Fiscal Compact. This would contain a strong statement of the value and importance of social policy in the EU and would help to address the long-standing concern that, come the crunch, the EU prioritises economic over social interests. This would send a stronger message to the legislature and to the courts of the role and function of social policy, a message that the phrase ‘social market economy’ has failed to send with significant force. So what might go in it?

Apart from general statements that the EU is about improving the living and working conditions of its population, I would like to see express reference being made to other social rights documents, including the European Social Charter of 1961, to create a greater opening of the EU to other international instruments. I would also suggest the need for a clause which explicitly requires the Broad Economic Policy Guidelines to take account of social matters. More radically, I would also like to see the mandate of the European Central Bank (ECB) to be extended, like that of the Federal Reserve in the US and other central banks, to promoting economic growth, as well as high levels of employment and social cohesion, and not just the maintenance of price stability, as specified in Article 127 TFEU.

Ideally any Social Compact would apply to all 28 states and take the form of a Treaty amendment. However, the current political climate makes this seem unlikely (the UK would certainly vote against, as might a number of other Member States worried about the implications of a Treaty amendment on their own national systems). This inevitably means looking at some sort of free standing Treaty, like the Fiscal Compact, which could be signed up to by interested Member States and have force under international law. Another model for flexibility would be to follow the pattern of the Euro Plus Pact, agreed by interested Member States. It is not legally binding but it is taken into account in the various soft-law processes rather in the way of the Stability and Growth Pact Resolution of 1997. 

Medium-term measures

I fully accept that a Social Compact is a long shot and that any reform protocol, while important, is not exciting. So what else could the EU be doing? I would suggest the EU go back to its roots and, as it did in the 1970s, specialise. There are three areas which could be singled out as needing the EU’s attention, where EU level activity might be justified given the transnational dimension, and where action has a direct connection with the European Semester: ageing population, enforcement, and addressing the consequences of privatisation.

The justification for EU involvement with management of an ageing population relates to the key issue of sustainability of public finances which, as the Eurozone crisis has shown, is a matter of common interest. The EU has long had expertise in the discrimination area, starting with sex and then in respect of other protected characteristics. Addressing age discrimination/extending working life initiatives/flexible working fits in with this specialisation while dovetailing with the EU’s social cohesion agenda. On a related issue, developing family friendly policies - which would include elder care as well as child care – would also fit within this theme. The reform of the Parental Leave Directive serves only to highlight other lacuna in EU provision such as the absence of provisions on the right to request reduced hours of working. There may be room for EU intervention here.

Second, there is a growing body of evidence that migrant workers are being mistreated by some employers in certain sectors, particularly meat processing. If these workers cannot, for practical reasons, enforce their rights, there is a role for the EU to consider intervening to require effective remedies. The new Directive 2014/54 on free movement of workers is a step in the right direction. But there is evidence that migrant workers do not enforce their rights through tribunals. This requires more pro-active enforcement. Is there a role for greater coordination at EU level of, for example, labour inspectors? Or even, more radically, some sort of Europol for labour inspections?

If the EU was to devote its attention to the position of (vulnerable) migrant workers, other issues arise for these workers (as well as for nationals). In particular, what sort of contracts do they have? In recent years there has been a proliferation of new types of contracting, including zero hours contracts, internships, crowd employment and employee sharing. To what extent do individuals engaged in this kind of work benefit from employment protection legislation traditionally given only to those defined as ‘employees’? Should the EU envisage legislating for a new type of contract such as Freedland’s contract to provide personal service which would provide a gateway to employment protection?

Third, privatisation of publicly owned industries and services is clearly an important part of the reform agenda for a number of Member States. What are the employment law implications of this? Does the Transfer of Undertakings Directive 2001/23 need revision to provide meaningful rights to transferees in the event of the transfer and for a significant period thereafter? How does the Directive fit into the public procurement process? Is it time for the transfer rules to be re-examined in the light of the new contexts in which they are being invoked? 

Legal basis to act

I have given some examples of what the EU might do to boost the social dimension. The question is how the EU might deliver them. The EU has significant legal competence to act in these fields – whether under Article 153 TFEU (the principal social policy legal basis), Article 21(2) or Article 25 TFEU (the citizenship provisions), Article 26(3) TFEU (on guidelines and conditions necessary for ensuring balanced progress in all sectors of the internal market), Article 46 TFEU (the legal basis on which Directive 2014/54 on measures facilitating the exercise of free movement of workers was adopted), Article 50(1) TFEU on freedom of establishment (the legal basis on which the directive on diversity information is proposed), the internal market legal bases, Articles 114 and 115 TFEU but, following the Monti II debacle, probably not Article 352 TFEU.

The use of any of these legal bases have (de)merits but what is even more important is the political will to act and that seems to be lacking in a number of Member States. So this raises the question of whether enhanced cooperation should be considered in the social policy field ‘to enable and encourage a group of Member States to cooperate inside rather than outside the Union, where it is established that the objectives pursued by that cooperation cannot be achieved by the Union as a whole’ (see the Unitary Patent case).The use of enhanced cooperation is strictly limited by the framework for enhanced cooperation between Member States found in Title IV of the TEU and Title III (Article 20 TEU) of Part Six of the TFEU (Articles 326 to 334 TFEU).  Provided these conditions are satisfied, there seems no good reason why enhanced cooperation cannot be used in the social field. It is far from optimal – but better than nothing. The Unitary Patent case may suggest, too, that it has the Court’s blessing.

Despite the doomsayers, the EU is still intact after the most tumultuous years of its existence. The European Social Model, too, has been battered by the crisis, but it was already in difficulties before that. Reforms were necessary. In the last five years, economic governance and its reform has predominated, often at the expense of the development of the social dimension. The European Employment Strategy has been accommodated – and largely subsumed by - the European semester. This loss of a separate and distinct identity of the EES has been damaging. (Part of) the EU is conscious of this and it maybe that the new European Parliament and the new Commission will recognise the need to raise the profile of social policy. The EU’s regenerative capacity in the field of social policy needs to be shown again. And there are lots of ideas as to what the EU might do.

A full version of these comments has appeared in (2014) 67 Current Legal Problems 1


Barnard & Peers: chapter 20 

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[1]Frank Vandenbroucke and Bart Vanhercke note, European Social Union: Ten Tough Nuts to Crack (Friends of Europe, 2014), 16. See also Commissioner Andor, ‘Social Dimension of the Economic and Monetary Union: what lessons to draw from the European Elections’, 13 June 2014 http://europa.eu/rapid/press-release_SPEECH-14-455_en.htm.

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