The EBA published today its Report on Investment Firms in response to the EU Commission’s call for advice last December.

The Report provides recommendations ‘aiming to provide a more proportionate and less complex prudential regime for investment firms based on appropriate risk and sensitivity parameters’. 

This is certainly very much needed. 

It is a very long document.  At page 78 there is reference to the EBA’s view on its approach to proportionality in remuneration.

This document is not the EBA Guidelines which are due out shortly but it does give us the heads up on a key point.  As you will remember, the EBA in its consultation published in March indicated that  all the CRD IV remuneration requirements were supposed to apply to all CRD IV firms,  even Tier 3 firms.  This would have meant that Tier 3 businesses would have had the bonus cap, deferral, use of equity, etc imposed on them.

In the attached document on page 78 the EBA  have said that this issue will referred back to the Commission. To see the Report click here.

To see the full document click on the Related Documents button at the top right. 

What does this mean

This is definitely a step in the right direction in relation to proportionality.  I think when we see the guidelines it will say that the Commission will need to resolve the extent to which proportionality applies to remuneration and I would hope that they will therefore not require the regulators to make the changes the EBA had proposed in their Consultation in March. 

The paper the EBA published today covers a lot more things but I thought you might want the heads up on the statement they have made about proportionality and remuneration. 

I will keep you posted as soon as I see the EBA  Remuneration Guidelines.

Extract from Page 78

3.3.11 Remuneration requirements

 It is important to consider the overarching aim of remuneration requirements for prudential purposes—i.e. creating a strong link between remuneration policies and risks—when considering their relevance to investment firms; other than the largest ‘bank-like’ proprietary trading firms, most investment firms commonly have different risk profiles, based on differing investor bases, risk appetites and risk horizons. Similarly, business models and structures typically vary from those in large banks, and correspondingly investment firms can have different pay structures.

 Therefore, one of the more specific challenges is related to the application of the proportionality principle, which could arise from the full application of the CRD/CRR remuneration requirements to investment firms. For instance, to take into account the case of:

  • agency brokers, where pay is structured primarily in the form of commission on matched trades, meaning the broker acts as an intermediary and does not risk the firm’s own capital. Commissions are only paid on trade completion;
  • private equity firms, certain asset managers and other investment firms operating carried interest plans (where bonuses are agreed upfront in line with the management fee);
  • wealth managers that may have few employees (less than 100) and may be structured as LLPs.

On the application of the proportionality principle, the EBA is investigating the impediments to a full application of the CRD remuneration provisions, with the view that specific exemptions could be introduced for certain institutions, including investment firms under certain conditions, in particular regarding the application of deferral arrangements and payment in instrument. In this regard, the EBA intends to send its advice to the European Commission, suggesting legislative amendments that would allow for a broader application of the proportionality principle. In addition, some issues regarding the investment firms may also be raised within the review of the remuneration provisions foreseen in Article 161 of the CRD, which might explicitly include legal proposals.