On 23 November, the Commission presented a comprehensive package of reforms aimed at further strengthening the resilience of EU banks and reducing risk in the banking sector, as well as making the new regulatory framework more proportionate to banks’ complexity, size and business profile. The package contains a number of legislative proposals including proposed amendments to the 2013 Capital Requirements Directive (CRD4).
Some of the proposed amendments relate to the so-called proportionality principle and to bankers' bonuses. The proportionality principle, which is intended to reduce the administrative burden of some of the remuneration rules for smaller and less complex institutions and for staff with low variable remuneration, has been confirmed and clarified.
The proposed clarification is in line with the conclusions of the European Banking Authority (EBA), which published an additional report on the matter on Monday 21 November looking at ensuring consistency in the way the proportionality principle is applied across the EU. If the amendments are adopted, some of the remuneration rules will not apply to smaller institutions, defined as “institutions the value of the assets of which is on average equal to or less than EUR 5 billion over the four-year period immediately preceding the current financial year”, or to “staff members whose annual variable remuneration does not exceed EUR 50,000 and does not represent more than one fourth of the staff member's annual total remuneration” (new Article 94).
The rules that will not apply are those on the use of non-cash instruments (for both remuneration and pension payments) and deferrals. Some flexibility is offered to Member States and competent authorities to adopt a stricter approach to the principle of proportionality.
As regards the so-called bonus cap (the maximum ratio between fixed and variable remuneration), the EBA has previously confirmed that it does not believe that the principle of proportionality can be applied to it, and the Commission’s proposal confirms this, so all firms subject to CRD4 will be required to apply the cap. This means that the bonus cap should continue to apply to all material risk takers.
The proposed amendments to CRD4 will potentially have far-reaching consequences for some of the member states who had adopted a wider interpretation of the principle of proportionality. Germany and the UK, for example, both allow for waivers of certain remuneration requirements on the basis of the size of the institution.
In the UK, the proportionality principle applies where an entity’s relevant total assets do not exceed GBP 15 bn (about EUR 21 bn). In Germany , the proportionality principle applies where the entity’s balance sheet does not exceed EUR 15 bn, although the supervisory authorities can nevertheless classify institutions with a balance sheet of less than EUR 15 bn as ‘major institutions’ (and therefore not subject to the proportionality principle) if this is necessary given the institution's remuneration structure and the nature, scale, complexity, risk content and international scope of its business activities conducted.
In both these countries, firms may disapply certain variable remuneration requirements, for example, those relating to deferral and pay-out in instruments in respect of employees who fall below a prescribed remuneration threshold. This prescribed remuneration threshold is set at EUR 50,000 in Germany (variable) and at GBP 500,000 (EUR 711,339) in the UK (total remuneration). In addition, in the UK, in order to qualify for this treatment the employee must not receive more than 33% of their remuneration as variable remuneration.
The Commission’s proposal has also clarified its position on the use of share-linked instruments, confirming that both listed and non-listed institutions should be able to use these (whereas a strict interpretation of the 2013 text has led the EBA to consider that listed institutions could only use shares).
Yesterday's publication by the Commission will trigger the start of the legislative process, with the Parliament and the Council looking at the Commission’s proposal and the usual trilogue taking place between the three institutions, most probably in the course of 2017 (this could even lead into 2018). There will therefore be many opportunities for MEPs and Member States to propose alternative amendments throughout the process. Brexit will most probably impact the process as well, in one way or the other.
After the formal adoption of the amendments to CRD4 by the EU institutions, the EBA will again play a role, as the proposed new text asks the EBA to adopt guidelines facilitating the implementation of the new provision on proportionality.
In the meantime, the EBA's latest Guidelines on sound remuneration policies adopted in December 2015 will take effect from 1 January 2017. The Guidelines contain restrictive views on proportionality (please read our January 2016 briefing); these will apply until the abovementioned new Article 94 and the other proposed amendments are adopted. Before the deadline for competent authorities to report on whether and to what extent they intended to comply with the 2015 Guidelines, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) in the UK had stated that they would not comply in full with the bonus cap provision but would retain their current proportionate, risk-based approach of requiring smaller firms to determine a ratio between fixed and variable remuneration which was appropriate for their business.