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 financial crisis by limiting bonuses awarded from 2015 to a sum no more than a banker's fixed pay, or twice that level with shareholder approval.
Britain, home of Europe's largest financial center, said the law will push up fixed pay and goes beyond the EU's treaty 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.
"In his opinion today, Advocate General Niilo Jääskinen 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.
"However, 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 since bonuses relate to risk taking at banks and can affect their financial stability while operating across Europe, they are an internal market matter.
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.
"While this is not necessarily the end of the UK's challenge, 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."
Britain had said that giving the EU's European Banking Authority powers to set the bonus cap was illegal but the opinion said the EBA had flexibility to interpret the law.
The opinion marks a setback for Britain and could give more ammunition to anti-EU campaigners who object to having decisions imposed by Brussels. The UK Independence Party, which rejects the influence of the EU over Britain, is hoping to win a vote on Thursday that would give it a second parliamentary seat.
Bankers, many based in the City of London, have tried to get round the bonus cap by bumping up fixed salaries - a move the bloc's banking watchdog has said is 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."
