LUXEMBOURG (AFP) - The top EU court's adviser on Thursday rejected Britain's legal challenges to a cap on banking bonuses, forcing Prime Minister David Cameron's government into an embarrassing U-turn.
The ruling is the latest setback to ties between London and Brussels, with Cameron pledging a referendum on leaving the EU in 2017 under pressure from eurosceptic rivals.
The EU set the rules in a bid to curb excessive risk-taking after the financial crisis, saying that bonuses cannot exceed a banker's fixed salary, or twice that if shareholders approve.
But banking is a pillar of the British economy and Cameron's government fiercely resisted the cap, fearing it could harm London's status as Europe's leading financial centre.
Britain took the case to the European Court of Justice in Luxembourg.
The court's Advocate General Niilo Jaaskinen gave a legal opinion saying that the limits were valid, and although the decision is not binding the European Union's top court mostly follows such recommendations.
"In his Opinion today, Advocate General Niilo Jaaskinen suggests that all the UK's pleas should be rejected and that the Court of Justice dismiss the action," the court said in a statement.
Following the ruling, British finance minister George Osborne said he would drop further legal action against the cap.
"It now looks clear that there are minimal prospects for success with our legal challenge, so we will no longer pursue it," Osborne said in a letter to Bank of England governor Mark Carney.
"But that should not stop us from pursuing our objective of ensuring a system of remuneration that encourages responsibility instead of undermining it," he said.
The opinion comes the same day as Cameron faces a local election defeat against the anti-EU UK Independence Party led by Nigel Farage.
UKIP is looking to gain a second seat in the British parliament and the courtroom setback will be further ammunition for the party's arguments that Brussels encroaches on national sovereignty.
Britain was pleased earlier this year when its man Jonathan Hill was appointed the new European commissioner for financial services, but responsibility for rules on bankers' bonuses has been removed from his portfolio.
'DEMOLISHES THE CASE'
Britain put forward a series of arguments against the cap, including the argument that Brussels has no right to limit pay in a member state.
But the advocate general said limiting a bonus "does not equate" to the fixing of pay.
"As there is no legal limit to the basic salary that can be paid there is no limit to the total level of pay," the statement said.
Osborne argued that limiting bonuses meant that fixed remuneration would increase, making it harder to "claw back" in cases of misconduct or to curb when companies face "financial distress".
"That is why the UK has consistently opposed the measure," he said in his letter.
In the wake of a scandal this month over traders rigging the foreign exchange markets, Carney has said that authorities may need more powers to regulate the pay of bankers as well as their bonuses.
But the City has generally come out hard against tighter oversight of bankers' activities, despite multiple scandals.
The British Bankers' Association had backed the legal challenge.
"We believe this law runs counter to recent reforms and will make the system less robust by incentivising firms to increase fixed pay," a spokesman said.
"It also puts European banks at a disadvantage when competing with firms in other parts of the world."