Britain’s George Osborne faces a lonely fight in opposition to European banking bonus cap as EU finance ministers are about to approve it in Brussels. Meanwhile London’s big banks consider suing the EU over pay regulation.

The finance ministers of the EU member countries are considering the controversial package of financial laws, which include the bonus cap, on Tuesday. The deal, backed and brokered by Ireland - which holds the EU’s rotating presidency - has the support of most EU lawmakers, who as a coalition outlined a proposal to cap banker bonuses at a  year’s annual salary (with a  few exceptions).

UK Chancellor of the Exchequer George Osborne looked isolated in Brussels as his EU colleagues showed their support for the bonus cap plan, while he was pushing for a deal based around deferred bonuses linked to long-term performance, rather than a flat cap at 100% of base salary.

Britain welcomes measures to make the banking system safer and bankers more accountable, but the pay cap could have "perverse effects" and encourage irresponsibility, Osborne said. 

According to Osborne the EU bonus cap plan has three main drawbacks: it will push basic pay up, it will make it harder to claw bonuses back and it will make it harder to make bankers pay when things go wrong.

The legislation has drawn strong support from power players like France and Germany, as the limit has placated voters’ outrage over the lucrative rewards of reckless banking practices. The measure only requires a majority vote, so a veto is not an option for the UK, the only country of the 27-nation bloc opposing the measure. 

British Chancellor of the Exchequer George Osborne is pictured prior to an Economic and Financial Affairs Council on March 5, 2013 at the EU Headquarters in Brussels. (AFP Photo / Georges Gobet)

London’s isolation

With an approval of the referendum, axiomatically, London has the most to lose. The city employs nearly 700,000 in financial services, which comprises up to 10% of UK economic output.

Analysts estimate the law will affect around 5,000 people in London, Reuters reports, or about 300-500 at each big bank. The new rules won’t apply to the majority of bank employees, but instead senior management and traders.

Former British Chancellor of the Exchequer Norman Lamont has publicly denounced the limit in an open letter to The Daily Telegraph calling it “economic lunacy” and a “huge mistake.”

The UK may be confusing the economic concerns of the city with the greater concerns of the EU.

"Everyone must live with what is on the table," France’s Finance Minister Pierre Moscovici said Monday."I told George Osborne when I was in London these moral rules apply to everyone, even ‘the City’."

London banks to sue EU?

London’s big banks are considering legal action against the EU if the vote to approve the bonus cap goes through.

The banks believe the cap limits corporate freedom, as well as pay regulation laws.

A London based law firm told the London Financial Times it believes the banks may have a case against the EU.

"We believe, on balance, that a mandatory provision fixing the maximum salary/bonus ratio payable in the banking sector not only contravenes European law because the EU lacks the requisite competence to legislate on issues relating to pay, but may also violate the constitutions of certain member states, such as Austria, Germany and Poland."

The EU believes the bonus limit is within its jurisdiction.

"We are confident this proposal is absolutely legally sound," said the European Commission.

"Excessive bonuses led to excessive risk and taxpayers having to step in. That explains why prudential regulation is needed,” the commission added. 

Following the Libor lending scandal, it is doubtful banks would risk a high profile lawsuit.

British bankers don't want to cut golden parachutes just yet
• Stuart Gulliver, HSBC CEO received a £1.95 million bonus for 2012
• This is down £2.2 million from last year, for total compensation of £7.4 million, HSBC said in its annual report published Monday.
• The London-based bank paid employees a total of £3.7 billion in bonuses in 2012, a 7% drop from 2011.
• HSBC doled out more high-end package bonuses than last year, increasing its 1-million-pound-plus bonus pool by 12 employees.
• Barclays has not yet released its bonus report, but last week told The Telegraph it has cut its 2012 bonus pool by 15%.
• RBS disclosed last week is had scaled back its bonus compensation by £59 million to help offset its Libor lending fine.

• A Permanent Economic Emergency