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Chancellor George Osborne is picking a fight with the European Union over their plans to limit the amount bankers can receive in bonus payments to a sum no more than 200% of their salary.
Mr Osborne says he is worried about the damage such a cap would do to London's global reputation, and he says the bonus cap may actually have help drive up bankers' wages.
Business Editor Laura Kuenssberg reports.
The European Parliament have agreed legislation to cap the total sum a banker can be paid in bonuses.
The new regulations are aimed at "stabilising" banking culture, curbing "excessive risk-taking" with a view to make banks "more resistant to crises", according to MEPs.
- Bonuses will be capped at a year's salary, but a bonus worth 200% of salary can be awarded with the approval of shareholders
- If more a bonus of more than 100% of salary is awarded, it has to be authorised by holders of half the bank's shares
- If a bonus of more than 100% of salary is awarded, then a quarter of the whole bonus would be deferred for at least five years in an effort to "encourage bankers to take a long-term view" according to MEPs.
The legislation is due to be implemented into national law by January 2014.
Shadow Chancellor Ed Balls said the legal action taken by Chancellor George Osborne against EU legislation to cap bankers' bonuses told the public everything it needed to know about the current government. Speaking at the Labour conference, he said:
"While we here are saying lets try and get energy prices down for families, lets help families with childcare, lets get get people back to work, David Cameron is sending his Chancellor to Brussels to stand up for bankers and bankers' bonuses."
George Osborne has filed a formal complaint against Brussels over plans to cap bankers' bonuses due to fears the move will backfire and drive up salaries.
The legal action was lodged on Friday, after it had been approved by the Chancellor.
An HM Treasury spokesman said: "These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers' fixed pay up rather than down, which will make banks themselves riskier rather than safer.
"Regulation of pay in this manner goes beyond what is permitted in the EU Treaty. That's why we are challenging these rules in the European Court, to ensure the legislation respects the EU Treaty and actually achieves what it's meant to."
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The government say that capping bankers' bonuses would mean banks would simply increase their bankers' salaries.