The ruling is a blow to Chancellor George Osborne who wished to overturn the EU’s plans to limit bonuses to 100% of salary or 200% with shareholder approval, viewing it as illegal.
Niilo Jääskinen, advocate of the ECJ, said he believed the EU legislation was valid although a final ruling is not expected until next year.
He said: “Fixing the ratio of variable remuneration to basic salaries does not equate to a ‘cap on banker bonuses’ or fixing the level of pay because there is no limit imposed on basic salaries that the bonuses are pegged against.”
The cap on bonuses is intended to reduce incentives for bankers to take excessive risks in the hope of securing bigger bonuses.
The Chancellor had previously said he felt the legislation had been pushed through without full consideration given to its implications. He is also worried top-earners will leave the UK in search of better pay.
UK banks have tried to circumvent the ruling by allowing staff to have special cash allowances which are categorised as neither salary nor bonus.
Earlier this year, the Bank of England unveiled plans to clawback bonuses from underperforming bankers for up to seven years.
A spokesperson for the British Bankers’ Association said: “We continue to support the Treasury’s challenge to this legislation. There have already been sweeping changes made to the way that bank staff are paid since the financial crisis. Bonuses are smaller and staff are rewarded for making decisions that benefit businesses, shareholders and the broader economy.
“We believe this law runs counter to recent reforms and will make the system less robust by incentivising firms to increase fixed pay. It also puts European banks at a disadvantage when competing with firms in other parts of the world.”
