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Government lodges objection to CRD IV bonus cap

Nick Thorpe
26/09/2013
The Government is reported to have lodged an objection with the European Court of Justice ("ECJ") to the bonus cap imposed as part of a wider package of financial reforms by the Capital Requirements The Government is reported to have lodged an objection with the European Court of Justice ("ECJ") to the bonus cap imposed as part of a wider package of financial reforms by the Capital Requirements Directive IV ("CRD IV").  This cap will apply to banks, building societies and certain investment firms.

The cap, which is due to come into force next year (and which would apply to performance years commencing on or after 1 January 2014), would limit bonus payments to certain key staff to one year's base salary or two year's base salary if a large majority of shareholders agreed. 

It is understood that the Government has challenged the cap on various legal grounds.  However, the Government's reported underlying concern is that the cap is likely to lead to increases in fixed pay and to be largely counter-productive, in that it may discourage firms from putting remuneration into deferred bonuses which could be clawed back.

The Government's objection is unlikely to be considered by the ECJ before the cap comes into force next year.  This has prompted some commentators to describe the objection as politically motivated, rather than substantive.  However, the Government's objection does raise further uncertainty around the introduction and implementation of the cap. 

The Financial Conduct Authority and the Prudential Regulatory Authority are currently consulting on the implementation of CRD IV, including the bonus cap.  Their consultations close on 30 September 2013 and 2 October 2013 respectively.  It is hoped that we will therefore gain greater certainty regarding the implementation of the new bonus cap following these consultations, so as to allow firms time to revise their remuneration practices and to mitigate the impact of the cap.

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