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.
Britain's finance minister, 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 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 Euro scepticism 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 think-tank. 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.
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.
But 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.
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.
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 Jan. 1, 2014.