BRUSSELS (Reuters) - Britain was left isolated in Europe on Tuesday after it failed to secure backing to water down new EU rules limiting bankers' bonuses, a measure that could threaten London's dominance as a financial centre.
The rules, which would limit bankers' bonuses to the equivalent of their salary, or two times their salary if shareholders agree, are set to be introduced next year and would represent the toughest bonus regime anywhere in the world.
They threaten Britain's financial industry the most, raising the risk that some banks and their top bankers could relocate to other financial centres outside the European Union.
Chancellor George Osborne appealed to EU ministers to change the rules at a meeting in Brussels, arguing that the proposed cap would have a "perverse" effect.
"It will push salaries up, it will make it more difficult to claw back bankers' bonuses when things go wrong, it will make it more difficult to ensure that the banks and the bankers pay when there are mistakes, rather than the taxpayer," said Osborne in a part of the meeting that was broadcast.
But none of the other 26 EU member states was willing to stand with him, and it looks very unlikely that any significant changes to the rules will be made. Since the rules do not require unanimous backing, Britain has no veto over the proposals.
"The space for further negotiation is quite narrow," said Michael Noonan, the finance minister of Ireland, which as the current holder of the EU's rotating six-month presidency negotiated the deal with the European Parliament.
Osborne's inability to fend off the reform, the first of its kind globally, underscores Britain's waning influence in the EU and is also likely to fuel deepening euroscepticism in Britain.
"Britain has done a lot to isolate itself from the rest of the European Union," said Philip Whyte of the Centre for European Reform, a thinktank. "It isn't exercising very much influence in European debates, pretty much across the board."
Officials indicated that the best Britain could hope for in further negotiations over the rules in the coming weeks was perhaps an increase in the amount of bonus that can be deferred and therefore discounted when calculating the total payout.
But Michel Barnier, the European commissioner for financial regulation and an author of the proposals, said the broad parameters would not change. Asked about the possibility of any legal challenge to the bonus cap, he replied: "Good luck."
Britain's powerful financial sector fears the rules will put London at a disadvantage and provoke an exodus of major banks and staff to rival financial centres, although HSBC, one of Britain's largest banks, has said it does not have any plans at this stage to move its headquarters.
German Finance Minister Wolfgang Schaeuble indicated that he would be uncomfortable with any country being outvoted on the new legislation, opening up the possibility of some change.
EU officials indicated that any alterations are likely to have only a slight impact on the total amount of bonus that can be paid.
"There is very little further we can do for them because we pushed the negotiations to quite a degree, and we got the best possible compromise with the parliament," Noonan told reporters before the meeting began. "There isn't any more room left."
Schaeuble told ministers he would back a greater flexibility in how a banker's bonus is calculated, which could allow banks to pay more over the long term, said one official who attended the talks.
Britain could also try to push to change the scope of the rules, which will apply to all EU bank staff globally, regardless of where they are based.
But any changes will also require the approval of the European Parliament. Othmar Karas, the Austrian lawmaker who drove the negotiations in parliament, said he did not see any reason to re-open the deal clinched last week.
While the finance ministers agreed not to finalise the deal on Tuesday, partly out of courtesy to Osborne, there is little appetite to change it. Officials indicated it would be approved later in March or possibly in April. The aim is to put the legislation in place from January 1, 2014.
Some in the British government believe banks could take legal action on the grounds that the European Union is going beyond its remit in legislating on remuneration, an official familiar with British thinking told Reuters.
AFME, the bank lobby group, stoked speculation, saying "it would not be surprising" if the industry were gathering "legal opinions". But the European Commission, which writes EU law, said it would be "absurd" to challenge the legality of the cap.
The new rules will not affect most bank staff, who on average earn bonuses of up to 30 percent of salary, but target senior management and so-called "risk takers", such as traders, whose bonuses can be many times their base salary.
Analysts estimate the law will initially affect around 300 to 500 people in each large bank, or around 5,000 people in London all told.
Additional reporting by Annika Breidthardt, Luke Baker and Ilona Wissenbach; Editing by Will Waterman