The European Banking Authority (EBA) published on 21 December its long-awaited final Guidelines on sound remuneration policies and its Opinion on proportionality.
Many smaller firms will be disappointed by the EBA’s conclusion that the bonus cap should apply to all firms within scope of the Capital Requirements Directive (CRD) regardless of size. However, they will welcome the EBA’s proposal for greater flexibility to exclude small and non-complex firms from requirements to apply deferral and payment in instruments for variable remuneration. The EBA has also proposed exemptions from those remuneration principles for staff in large institutions who receive low variable remuneration, and to allow listed institutions to deliver variable remuneration through share-based instruments.
The final Guidelines also contain important changes in relation to how the EBA expects firms to take account of LTIPs in applying the bonus cap.
The EBA intends the final Guidelines to apply from 1 January 2017 with the current CEBS1 guidelines remaining in force until the end of 2016. It has also proposed amendments to CRD to give effect to the proposed exemptions.
The European Commission plans to submit a review of the remuneration provisions (including on the application of proportionality) by the end of June 2016 to the European Parliament and the Council.
The FCA has published a statement stating that, together with the PRA and HMT, it will review the proposed changes and their application to the UK market, and will consult on any necessary changes to domestic rules and guidance.
Part of the Guidelines apply to all staff, ensuring that institutions have in place sound remuneration policies. Other parts focus on the specific provisions applicable for the remuneration policies for staff identified as material risk-takers in accordance with CRD rules. The responses to consultation2 had raised concerns about the limited application of the proportionality principle which has led the EBA’s recommendations for exemptions for smaller firms.
The final Guidelines:
- set out the requirements for remuneration policies, the corresponding governance arrangements and the processes which should be applied when remuneration policies are implemented
- provide details on the application of the requirements in a group context and with regard to the proportionate application of the CRD requirements
- set out criteria for the allocation of remuneration to its fixed and variable components, taking into account the EBA opinion on the use of allowances.
- clarify the requirements of the CRD regarding variable remuneration and how remuneration should be aligned to the risks of the institution
- provide additional details on disclosures required in this area under Regulation (EU) No 575/2013 (CRR).
Calculation of the bonus cap
One aspect of the draft Guidelines that caused concern for many institutions was the inclusion of LTIP awards in the calculation of the bonus cap applied to the ratio by which an individual’s variable remuneration can exceed fixed remuneration.
The EBA has revised the final Guidelines in response to consultation. Rather than requiring LTIP awards to be included at the time performance conditions are met, awards will be counted towards the bonus cap in the financial year in respect of which the LTIP is granted. Special rules will apply to new joiners who receive a sign-on LTIP award based entirely on future performance.
Retention bonuses will also count towards the bonus cap. Firms will need to count the retention bonus towards the cap either on a linear basis with a pro-rated annual amount for each year of the retention period, or at the end of the retention period when the full award is made.
Tax treatment for clawed back awards
One issue which the EBA has declined to address in the final Guidelines is whether clawback should be applied to the gross or net amount of an award. The EBA has instead left this to Member States to determine through their own tax regimes.
Opinion on Proportionality
For some of the remuneration principles, the CRD sets out quantitative minimum requirements (e.g. 40% deferral of variable remuneration and a limitation of variable remuneration to 100% (200% with shareholders’ approval) of fixed remuneration).
However, the extent to which small institutions could implement less complex remuneration policies raised interpretation questions. In the consultation paper, the EBA stated its view that the remuneration principles in CRD must be applied to all institutions but that specific exemptions could be introduced for institutions which did not rely extensively on variable remuneration and for identified staff who receive only a low amount of variable remuneration. Responses to the consultation showed that there were different legal interpretations of the proportionality clause which have led to different applications of the remuneration principle at national level.
The EBA therefore recommends action at the level of EU institutions in order to ensure consistency of approach across the EU. This should take the form of legislative amendments to exclude small, non-complex institutions from the requirements to apply the remuneration principle regarding deferral and payment in instruments for variable remuneration and to limit the scope of those remuneration principles as regards staff who receive low amounts of variable remuneration, including in large institutions.