The European Banking Authority has published the final version of its updated guidelines on the CRDIV remuneration requirements.
The EBA is also proposing amendments to CRDIV, to introduce specific exemptions which would permit smaller and less complex firms to disapply the requirement relating to the deferral of up to 60% of variable pay and the payment of up to 50% of variable pay in shares or other instruments. The EBA is not, however, proposing exemptions to the “bonus cap” (limiting variable remuneration to 100% of fixed remuneration, or 200% with specific shareholder approval), which will therefore apply to all CRDIV firms from 1 January 2017. If implemented by local regulators this will extend the bonus cap to all CRDIV firms, including all banks, asset managers and other investment firms regulated under CRDIV.
In an Opinion published alongside the Guidelines, the EBA has repeated its view that the current CRDIV text does not permit smaller and less complex firms to “neutralise” any of the remuneration requirements (even though this is a view which many felt is legally flawed, as we discussed in our previous briefing available here).
The EBA has recognised, however, that nearly all Member States currently permit some degree of neutralisation and that, given the different interpretations taken of the CRDIV text, it should be for the European Parliament and the European Council to clarify their intentions as to whether or not the CRDIV should allow for the neutralisation of certain of the requirements. The EBA, along with the European Commission, is therefore proposing to submit a report to the European Parliament and European Council by June 2016, with a view to the CRDIV text being amended.
The EBA’s Opinion includes a draft legislative proposal, which if implemented would permit smaller and less complex firms to disapply the requirements relating to deferral (and therefore malus) and payment in instruments. The proposal would also codify a separate exemption from these same requirements for staff who have “low levels” of variable remuneration.
The EBA’s draft legislative proposal does not, however, provide the same exemptions in relation to the bonus cap and so, without further amendments, would result in all CRDIV firms being required to apply the bonus cap from 1 January 2017. This would include all banks, asset managers and investment firms currently falling in the FCA and PRA’s proportionality level 3. This would not affect firms regulated solely under the BIPRU, AIFM and/or, in due course, the UCITS V Remuneration Codes (i.e. where the firm is not also an IFPRU investment firm), unless they are within the same consolidation group as a CRDIV firm.
This is, at this stage, only a proposal from the EBA. It remains to be seen how this will progress over the coming months and, in due course, whether the proposal will receive support from the European legislators. The EBA also assumes that the necessary legislative process can be completed before the new Guidelines come into force from 1 January 2017, although it is not yet clear whether this is realistic and, in any event, raises the prospect of uncertainty continuing through most of 2016 at least.
The Guidelines themselves (which set out the EBA’s updated guidance on all aspects of the CRDIV remuneration regime) are directed at local regulators, and so 2016 will see consultations from the FCA and PRA on consequential changes required to the UK Remuneration Codes to reflect the updated Guidelines. As the Guidelines operate on a “comply or explain” basis, regulators have the option of declining to follow the EBA or taking a different approach; however, any such flexibility would not extend to any changes to the proportionality principle which are implemented through legislative changes.
Once we have been able to fully analyse the EBA’s Opinion and the final Guidelines, we will be producing a fuller briefing to highlight some of the other key points which include updates on the EBA’s thinking on how to classify fixed and variable remuneration, changes to the way in which Long Term incentive Plans need to be valued (at grant, rather than at vesting) and clarification on the treatment of carried interest.
The EBA’s Opinion and the final Guidelines are available here.