Britain is heading for defeat in its challenge to EU’s bankers’ bonus cap

Britain's relations with the European Union took another knock on Thursday when its legal challenge to a limit on bankers' bonuses was rejected by an adviser to the bloc's top court.

The EU law aims to curb the kind of risk-taking that led to the 2007 to 2009 financial crisis by limiting bonuses awarded from next year to a sum no more than a banker's fixed pay, or twice that level with shareholder approval.

Britain, home to the City of London where most of the bankers hit by the cap are based, said the law would push up fixed pay and goes beyond the EU's powers, a sensitive subject at a time of rising British anti-EU sentiment.

The adviser, whose opinions are non-binding but are generally followed at least in part by the Luxembourg-based European Court of Justice, supported the limit on banker bonuses and said it did not restrict the total amount of pay.

"Advocate General Niilo Jaaskinen suggests that all the UK’s pleas should be rejected and that the Court of Justice dismiss the action," the ECJ said in a statement.

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"Fixing the ratio of variable remuneration to basic salaries does not equate to a 'cap on bankers bonuses', or fixing the level of pay, because there is no limit imposed on the basic salaries that the bonuses are pegged against."

Jaaskinen said that bonuses were an internal market matter as they relate to risk taking at banks that could affect financial stability in Europe.

Britain's finance ministry said it was considering the opinion and its implications. The full court is expect to issue its ruling on the UK challenge in early 2015.

"It doesn't give the UK much hope of success when the Court hands down its decision early next year," said Rob Moulton, a regulatory partner at Ashurst lawfirm.

"Some may even say it’s a clear indication of the likely winner in the power struggle between the EU and the UK."

The opinion is a setback for Britain and gives ammunition to anti-EU campaigners who object to having decisions imposed by Brussels. The UK Independence Party, which rejects the EU's influence over Britain, is hoping to win a vote on Thursday that would give it a second seat in the British parliament.

Steven Woolfe, a UKIP member of the European Parliament, said the opinion showed UK Prime Minister David Cameron's attempts to reform the EU before a promised referendum on Britain's EU membership "were dead in the water."

Britain, the only EU state to oppose the bonus law, had said that giving the EU's European Banking Authority powers to set the cap was illegal but the opinion said the EBA had flexibility to interpret the law.

Barclays and Standard Chartered have raised allowances to compensate for the impact of the bonus limit. The EBA has said most of these allowances are illegal.

Bank of England governor Mark Carney and others have said that bankers' fixed salaries may also need regulating.

“The bonus cap alone is too blunt an instrument to curb risk taking in the banking industry," said Tom Gosling, head of PwC's reward practice.

“It's unlikely that the bonus cap itself causes existing business to up sticks and move away from London. However, it does make London somewhat less attractive as a place to build new capability."

The British Bankers' Association said shareholders and not politicians should have the powers to determine pay.

(editing by Adrian Croft and Anna Willard)