HomepageCommercial LawPrivate LawPublic Law & Human RightsCriminal LawEU & International LawCareers


Have Irlen Syndrome, or need different contrast? Click the button below for options.

Background Colours


Enter you email address below to subscribe to free customisable article notifications.

Alternatively, click the button below for our various RSS Feeds (available journal wide, or per section).

A Bonkers Bonus Cap? Reigning In Remuneration

Article Cover Image

About The Author

Rowan Clapp (Former Public Law & Human Rights Editor)

Rowan graduated from Durham University in 2013 with a First Class degree in Philosophy and Theology. He completed the GDL at BPP University on a Lord Haldane Scholarship and Hardwicke Entrance Award from Lincoln’s Inn. He is currently undertaking an LLM at University College London and working as a volunteer caseworker at Reprieve.

Image © Graham Duerden

[This is] possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire

Boris Johnson.

From American Psycho, to the impassioned criticism in the British and American press, bankers have been consistently vilified in recent years as harmful, greedy narcissists. The most recent legal check on the Wayne Rooneys of the corporate world comes in the form of an EU legislative package: the CRD IV (Capital Requirements Directive IV). It limits the salaries of those who work in banks, building societies and investment firms and is the latest responsive measure intended to stabilise the financial industry and promote accountability and responsibility in banking.

This article intends to provide an introduction to the CRD and the challenges raised against it by the UK banking industry. It is not concerned with a discussion of whether bankers’ bonuses are ethically justifiable. I would direct those who are interested in that valuable debate to this episode of the Public Philosopher on BBC Radio 4 or to Thomas Piketty’sCapital in the Twenty-First Century’. Instead, this article focuses on the pragmatic, regulatory and legal issues that make the CRD IV difficult to accept.

Ben Moshinsky and Jim Brunsden of Bloomberg contend that the purpose of the CRD IV is to ‘reign in the gambling culture blamed for helping trigger the 2008 financial crisis’. Certainly, there is a need to ensure that the spectacular failures of recent years are not repeated. However, I am inclined to agree with the Mayor’s classically informed position that begins this article and the Telegraph’s blunt assessment that this is ‘an idiotic plan’.

George Osborne has withdrawn his challenge to the EU cap on bankers’ bonus on the basis that ‘[he] will not spend taxpayers’ money on a legal challenge now unlikely to succeed’. This concession is a result of ECJ Advocate General Niilo Jääkinen’s recent support for the reasoning behind the cap and rejection of the UK government’s six arguments against the Fourth Capital Requirements Directive (CRD IV).

Under the CRD IV, which applies to banks and credit institutions of EU member states, the ratio between fixed and variable remuneration (‘bonuses’) is set at 1:1. Companies may increase this to 1:2 with the approval of shareholders. The standard for obtaining this approval is a ‘super-majority’ of 66% or a 75% majority. Quite simply, then, bankers’ bonuses are capped at either 100% or 200% of their basic salary, pending approval from shareholders.

In this article, I will explain the now-defunct challenge and indicate whether, legally and politically, the Chancellor’s arguments against CRD IV should have been taken more seriously. The Treasury’s six main areas of objection to the legislation are summarised below. The main analysis of this article addresses the two most prominent challenges: that the CRD IV is unfit for purpose, and that it lacks a legal base.

  1. Unfit for purpose: That the measures implemented are more likely to ‘[u]ndermine responsibility in the banking system rather than promote it’ by encouraging growing fixed salaries. This, allegedly, will make the banking system less stable.
  2. Unlawful delegation: That the delegation of the task to the European Banking Authority (EBA) is a policy issue beyond its remit. This requires the EBA to act ultra vires when its obligations under Article 114 TFEU (the treaty in which its powers are described) are considered.
  3. Invalid legal base: The bonus cap requirement is not compatible with the Treaty base for the Directive (which concerns freedom of establishment). The disclosure provisions on individuals’ pay contravene the legal base of the Regulation, which expressly excludes legislation ‘affecting the rights and interests of employed persons’.
  4. Lack of legal certainty: That it is not explicit whom the cap will apply to.
  5. Failure to protect personal data: That the analysis of bankers’ salaries could go too far, infringing on individuals’ right to privacy.
  6. Wrongful application outside the EEA: The application of the bonus cap provision outside the EEA (European Economic Area) is extraterritorial and not properly justified.

Many will be encouraged to hear that the ‘morally obscene’ salaries of city fat cats are being curbed as a result of ‘banks' mind-boggling bonuses, feckless lending, and shocking customer service’. Secretary of State for Business, Vince Cable in particular should take cheer that an industry he believes to be dominated by ‘spivs and Gamblers’ is finally being reigned in.

Without condoning the excesses of the city and the disparity between ‘Code staff’ or significant employees, and the ordinary man, it is relatively obvious to me that Mr. Osborne has a point.

The Chancellor of the Exchequer believes that the limitation of salaries will not have the regulatory effect intended. Rather than encouraging ethical banking, the CRD IV will result in a loss of control over the financial sector. This is worth considering: imposing a limitation does not necessarily facilitate superior regulation of the city.

The Regulatory Challenge

The Chancellor of the Exchequer’s objection boils down to the belief that that ‘these badly designed rules … are pushing up bankers’ pay not reducing it’. Here he advances the counterintuitive suggestion that the limitation could result in bankers earning more. There is certainly support for this argument. Salaries for senior bankers rose by 26% in 2012 in anticipation of the CRD IV. The EBA conceded that this belied a ‘material shift from variable to fixed remuneration’.

Consequently, this will mean that in times of downturn such as the 2008-12 Global Recession, it will be more difficult to control the fixed costs banks have. As Mark Carney, Governor of the Bank of England, notes, this has the ‘undesirable side effect of limiting the scope for remuneration to be cut-back’, meaning that banks will be more vulnerable in response to financial troughs than pre-CRD IV. John Thannassoulis, professor of financial economics at Warwick Business School agrees with this position, noting that the CRD IV ‘will represent a crippling bill for banks in times of stress’ and quite simply ‘makes banks riskier'. Andrew Tyrie (Chairman of the Treasury Select Committee) also writes of the CRD IV as a ‘crude tool’ that ‘will encourage banks to increase fixed pay rather than embed incentive structures that improve standards’.

These well-informed criticisms seem justified. In order to still attract the most talented employees, banks are likely instead to rely on boosted base salaries, such that the overall amount of remuneration will be comparable to the amount offered pre-CRD IV. Clearly in line with the warnings issued above, where salaries are driven up, banks will lose the ability to react to financial downturn with any kind of agility if they are contractually obliged to pay their employees a high sum. It is easy to see how, in contrast, a bonus could be significantly reduced or even not offered at all as a company cuts its cloth according to its means. 

What the Advocate General did offer as a crumb to Osborne, however, was that there was not really going to be a cap on bankers’ salaries at all. He stressed that the limitation on ‘variable remuneration’ of bankers should not be regarded as a ‘cap’ as there is no limit on bankers’ basic salaries in the legislation. As the Freshfields team put it, ‘The Commission’s position is that overall pay is not being fixed, only the ratio between one element of pay and another’.

The Advocate General is hardly providing a breathtaking explanation. Merely repeating the terms of the limitation can surely not be the justification for it. It also seems difficult not to equate the phrase ‘variable remuneration’ with ‘bonus’. However as it is phrased, it does not take a leap of the imagination to view the CRD IV as a bankers’ bonus cap. As Mr. Osborne and a stack of economists (Tannassoulis, Tyrie and Carney are fairly authoritative) have stressed, this may seem prima facie like a positive measure discouraging bankers from taking huge risks to secure even greater rewards. Yet, on closer inspection of the city’s reaction to the limitation, it is clear that the CRD will not promote responsibility and safety but instead make the industry less agile in response to changing markets. It discourages risk-taking on an individual level and promotes it on a much larger scale, inviting severe consequences. Paying Code Staff larger salaries is a far larger risk threatening the life of the bank itself and could be engaged by a far smaller downturn in the market than we have seen in 2008.

The Legal Challenge

More important than the pragmatic issues raised by the Chancellor, however, there seems to be a more iron-clad objection to the CRD IV. Quite simply it appears incompatible with 153(5) TFEU, which holds that:

The provisions of this article shall not apply to pay, the right of association, the right to strike or the right to impose lock-outs.

If the CRD did not operate in application “to pay” then there would be no point in its implementation. As such, this seems incongruous with the Capital Requirements Directive (2013/36/EU)(CRD) and Capital Requirements Regulation (575/2013)(CRR) which collectively comprise the CRD IV.  Both expressly apply to pay. Alexandria Carr, a regulatory lawyer from Mayer Brown starkly recognises that ‘the Treaties expressly prohibit the EU regulating pay as part of social policy’.  AG Jääskinen has kindly conceded that this 'provided the most cogent reasons for questioning the validity of the measures impugned'. The AG’s response to the Article 153(5) challenge however, is that:

The rules set up through Articles 92 to 94 of the CRD IV Directive can, at most, be viewed as having a link with pay, while the Council adds that the amount of the fixed component is left to the remuneration negotiation between the staff and the financial institution.

The AG believes that, because there is no limit on the overall pay afforded to bankers each year, the bonus cap is in accordance with 153(5) TFEU. Yet on the basis that, historically, the vast proportion of bankers’ overall salaries are comprised by bonus earnings, there is a case that the cap on these bonuses implicitly limits overall pay. This is especially true when examined in tandem with the loss of flexibility that comes with increasing fixed salaries mentioned above. In fact, Andrew Bailey (UK’s top banking supervisor) says that the cap will drive up fixed salary costs by £500 million a year.

To dismiss this as having ‘at most …. a link with pay’ seems lazy and plainly false. Imposing a limit on the bonus capabilities of an employee generally must also limit his pay in realistic terms. This simple assessment is amplified in the banking industry where a bonus will comprise the majority of the worker’s yearly earnings. That the ‘variable remuneration’ has to be limited to 100%/200% at all endorses this overview of how bankers earn their money. Simply because this is not labeled as “salary” does not mean that it is not “pay”.

It is difficult to see how article 153(5) can be reconciled with the CRD IV. Sadly, now that Osborne has withdrawn the UK’s challenge to the legislation, we are unlikely to hear the AG explain his position any further. My submission would be that he would elaborate on what I hope to have shown to be a fairly tenuous justification.


As already indicated, banks have responded to this legislation by driving up their fixed salaries. As I have also indicated, this is potentially problematic, principally because ‘someone’s salary is legally more watertight and difficult to attack than a variable bonus’.

Banks such as HSBC Plc, Barclays Plc and Royal Bank of Scotland Plc have been using role-based allowances to circumvent the EU ban on bonuses. For example, HSBC Boss Stuart Gulliver gets £1.7m in shares quarterly on top of his bonus and salary. António Hora-Osório, head of Lloyds is also receiving a £500,000 pension contribution and payout from a long-term incentive plan that could be as much as £2.9m. Robin Hood Tax campaigners note that the advent of allowances has not so much avoided the EU rules on bonuses as ‘driven a coach and horses through them’. That seems to be loosely true. However, it also seems that this was an entirely foreseeable response to an ill thought out regulation. Andrew Bailey adds to his earlier comments, noting that ‘the best thing I can say about allowances is that they are a response to a bad policy.’

Whilst this is a way to circumvent the problem, it seems that this policy will come under fire from the EBA. As this form of remuneration is also variable, it is a technicality that it is not explicitly a bonus. It is likely that in time, allowances of the kind currently offered will also be excluded under a clarification of the CRD IV. It is perhaps then that the fixed contracts of bankers will take an even steeper increase than already indicated since 2012. Only then will we assess the impact that the CRD IV has had on the stability of the banking industry.


I would stop short of the bleak assessment that the CRD cap is a result of an animosity between other Eurozone countries and the “financial services focused” UK. Some have been brazen in summarising that:

[There has] long been a rather petty jealousy on the Continent about the success of the City and financial services in Britain as a whole

Instead, I would submit that the CRD IV is an inadequate device that will not regulate ‘morally obscene’ salaries in the way intended. Further, it has the unfortunate and adverse consequence of making one of the most important industries in the UK less stable. That is not to mention the unanswered questions surrounding the illegality of the EU measures. Hopefully, in time, further explanation of the Attorney General’s remarks will be provided. Quite simply though, it seems that, as Chris Blackhurst, the former Editor of The Independent puts it, ‘[t]he French and Germans, in their desire to clobber banks have royally screwed up’.

For the latest articles straight to your inbox, you can subscribe for free. Alternatively, follow @KeepCalmTalkLaw on Twitter or Like us on Facebook.

Tagged: Banking & Finance, Commercial Law, European Union

Comment / Show Comments (2)

You May Also Be Interested In...

Commercial Awareness: The Fortnightly Round-Up (w/b 28th August)

3rd Sep 2017 by Jack Turner

The problem with foreign currency loans

26th Feb 2016 by Rowan Clapp

The Impact of the CRA on Financial Services

11th Nov 2015 by Anirudh Mandagere

The Legal Mechanisms of a Greek Exit

21st May 2015 by Alex Hitchcock

UK Counts Itself Out of European Account Preservation Order

3rd Jul 2014 by Edmund Day

Tackling Fraud and Corruption in the European Union

14th Jun 2014 by R T

Section Pick May

Coronavirus and Contracts: Is Frustration in Play?

Editors' Pick Image

View More


Keep Calm Talk Law: Moving Forward

3rd Sep 2019

Changing of the Guard: Moving Keep Calm Talk Law Forward

12th Aug 2018

An Anniversary or Two: Four Years of Keep Calm Talk Law

11th Nov 2017

Rising from the Ashes: The Return of Keep Calm Talk Law

18th Nov 2016

Two Years On, Keep Calm Talk Law’s Legacy is Expanding

11th Nov 2015


Javascript must be enabled for the Twitter plugin to function. Click below to visit us on Twitter.

Free Email Subscription

Subscribe to Keep Calm Talk Law for email updates, and/or weekly roundups. You can tailor your subscription on activation. Both fields are required.

Your occupation / Career stage is used to tailor your subscription and for readership monitoring.

Uncheck this box if you do not want to receive our monthly newsletter.

By clicking the Subscribe button, you agree to our privacy policy and terms of service. Please ensure you read these in full.

Free Subscription