The EU Capital Requirements Directive (CRD) went into effect on January 1, 2014. The CRD introduced what is commonly referred to in the European Union as a “bonus cap” on individual variable remuneration when paid to employees by EU banks and investment firms. Under the CRD, variable remuneration for such individuals is required to be capped at 100 percent of the relevant individual’s fixed remuneration (i.e., a ratio of 1:1 for salary to bonus), or at 200 percent if shareholder approval is obtained (i.e., a ratio of salary to bonus at 1:2).
On December 21, 2015, the European Banking Authority (EBA) published final guidelines in relation to sound remuneration policies (Guidelines) under the CRD. The Guidelines set out the requirements for remuneration policies, the corresponding governance arrangements and the processes that should be applied when remuneration policies are implemented.
The EBA also separately published a formal opinion on proportionality requirements (Opinion), in which it proposes to amend the CRD to exempt smaller and less complex firms, and employees who receive only a small amount of variable remuneration, from stricter requirements in relation deferral arrangements and pay-out requirements. However, it should be noted that the EBA clarified in the Opinion that it does not propose any exemptions to the CRD bonus cap.
The UK financial media is widely reporting that HM Treasury does not have the desire to comply with the EBA Guidelines, which are indeed merely guidelines for EU national regulators. It would seem that the view of HM Treasury is that the cap on bonuses for bankers and employees of investment firms is potentially a step too far, making the United Kingdom an un-competitive place to do business because of the potential risk of talented employees being drawn to employment in Asia or the United States. Guidelines issued by EU regulatory supervisory authorities such as the EBA, European Securities and Markets Authority, and European Insurance and Occupational Pensions Authority, are not strictly binding on any EU country--though there is an established practice of “comply or explain”--and it seems that there may be appetite at HM Treasury (and by extension, in the UK Government and at the Financial Conduct Authority) for the United Kingdom not to comply and to explain that these bonus cap rules are excessively punitive on the UK financial services sector. It remains to be seen what action will actually be taken. The EBA intends for the Guidelines to apply from January 1, 2017.
The CRD is available online here.
The EBA press release can be found here.
The Guidelines can be found here.