THE EUROPEAN BANKING AUTHORITY (“EBA”) PUBLISHES FINDINGS ON BANKERS’ REMUNERATION

On 15 October 2014, the EBA published its report into role-based allowances in the EU banking sector. The report found that, in some cases, banks have been seeking to avoid EU restrictions on banking bonuses by creating incentive structures to reward “role- based” tasks.

The report found that institutions have increasingly been creating role-based allowances which are not explicitly linked to performance and are notionally linked to the position and organisational responsibility of staff. This categorisation has helped banks avoid the limits imposed by the Capital Requirements Directive IV (“CRD IV”), which sets an upper threshold for discretionary remuneration of 100% of the fixed salary of the individual (or 200% if shareholder approval is granted).

The EBA’s analysis concluded that discretionary allowances paid to bankers should be considered as variable remuneration in line with the CRD IV.

The accompanying opinion states that, in order to qualify as part of the fixed salary for the purposes of CRD IV, any role-based allowances should be determined in advance, transparent and permanent to the role in question. The EBA specifically warned firms that such allowances should not be used to incentivise risk taking or be non-revocable.

In the press statement, the EBA reminded EU competent authorities to use necessary supervisory measures to ensure that firms’ remuneration policies comply with the CRD IV by 31 December 2014.

EUROPEAN CENTRAL BANK (“ECB”) SEPARATES ITS MONETARY AND SUPERVISORY FUNCTIONS

The ECB has published a decision (ECB/2014/39) to separate its monetary and supervisory functions.

Article 25(2) of the Single Supervisory Mechanism Regulation (Regulation number 1024/2013) (“SSM Regulation”) requires the ECB to perform a number of supervisory tasks which are clear and distinct from its role as the setter of monetary policy. The decision to split the functions has been taken to mitigate the risks associated with this.

In making the decision, particular attention was focussed on ensuring exchange of information and ideas between the separated functions, whilst maintaining strict professional secrecy where appropriate.

The split became effective on 23 September 2014, the day after its publication in the official journal.

SYSTEMATICALLY IMPORTANT PAYMENT SYSTEMS (“SIPS”) ANNOUNCED BY ECB

The ECB issued a press release on 21 August 2014 that identified what it considers to be SIPS. The announcement is the first time that the ECB has exercised its regulatory power over payment systems.

The four institutions identified were:

  • TARGET2 operated by the Eurosystem
  • EURO1 operated by EBA CLEARING
  • STEP2-T operated by EBA CLEARING
  • CORE(FR) operated by STET

The identified systems will now be required to comply with the ECB SIPS regulation (Regulation 795/2014), which entered into force on 12 August 2014. Competent authorities (such as central banks with primary responsibility over the payment systems) will be required to regularly assess the compliance of these payment systems with the regulation.

EUROPEAN SECURITIES AND MARKETS AUTHORITY (“ESMA”) PUBLISHES RESPONSES TO EUROPEAN MARKET INFRASTRUCTURE REGULATION (“EMIR”) CLEARANCE SYSTEMS CONSULTATION

On 19 August, ESMA published a list of responses to its Consultation Paper on the Clearing Obligation under EMIR (no. 1). The 46 responses come from a variety of sources, including asset management, banking and insurance markets.

EMIR is designed to reduce systemic risk by requiring certain OTC derivatives to be cleared. The Consultation Paper focuses on the “bottom up” approach detailed in EMIR Article 5(2), where the class of OTC derivatives currently being cleared by authorised or recognised central counterparties would be used to determine the class of new derivatives.

RESPONSES TO ESMA CONSULTATION ON THE MARKET IN FINANCIAL INSTRUMENTS DIRECTIVE (“MIFID”) II

ESMA have received and published a large number of responses to their consultation paper on the implementation of MiFID II.

MiFID regulates the authorisation and supervision of investment firms and trading venues. The consultation paper sought input on organisational requirements and operating conditions for investment firms, and predominantly focused on areas where they differ from MiFID I.

Responses have been provided by a number of bodies including asset management, banking and investment service providers, as well as law firms and regulated exchanges.

EUROPEAN COMMISSION (“EC”) REPORTS ON EUROPEAN SUPERVISORY AUTHORITIES (“ESAs”)

On 8 August 2014, the EC published a report to the European Parliament and Council on the operation of the ESAs within the European System of Financial Supervision (“ESFS”).

The ESAs include the European Banking Authority, the European Insurance and Occupational Pensions Authority and ESMA. Together with a network of national competent authorities, the Joint Committee of the ESAs and the European Systemic Risk Board (“ESRB”), they form part of the ESFS.

The report states the aim of the institutions were to establish a superior system of financial supervision. In the three years since their inception, the review states the ESAs have performed well, through building functioning organisational structures as well as enhancing their own identities.

The report does, however, outline a number of possible future steps for improvement in the short and medium term including a greater consumer focus and making better use of peer reviews. In the longer term, areas for consideration included potential governance and funding issues.

The report was issued with an accompanying press release.

EC REPORT ON THE ESRB

The EC has reported to the European Parliament and Council on the performance of the ESRB.

The ESRB was set up in 2010 to provide EU-wide macro-prudential oversight. Whilst recognising the difficulties in assessing the ESRB’s performance, the report notes the strengths and successes of the ESRB including the wide range of expertise it is able to draw upon and its crucial role in helping to develop macro-prudential financial policies for the EU.

Whilst improvement in some areas was considered necessary, the changes were capable of being implemented internally within the ESRB without further legislative action. These include more pro-active communication and adopting a greater purview of focus.

The accompanying press release can be found online.

REGULATION FOR A SINGLE RESOLUTION MECHANISM (“SRM RESOLUTION”) PUBLISHED

On 30 July 2014, the SRM Resolution was published in the Official Journal of the EU.

The Regulation, published only a year after its initial proposal by the European Commission, provides a pan-European solution to bailing out banks which end up in financial difficulty. The newly created Single Resolution Board (“SRB”) will assess whether any bank established in an EU state participating in the Single Supervisory Mechanism (“SSM”) is likely to fail and will then prepare possible mechanisms for that bank’s resolution.

A single resolution fund will also be created to finance the project, which will be paid for by contributions from the banking industry.

The Regulation officially came into force on 19 August 2014, although it will not become fully operational until 1 January 2016.

SINGLE EUROPEAN PAYMENTS AREA (“SEPA”) MILESTONE FOR RETAIL CREDIT TRANSFERS AND DIRECT DEBITS

On 1 August 2014, the ECB announced that SEPA had been successfully implemented for credit transfers and direct debits in the European area.

The new standardised format will allow for over two billion payments a month across the European Economic Area and will allow both consumers and businesses to use a single bank account for all credit transfers and direct debits.

Yves Mersch, an ECB Executive Board member, announced “The successful completion of SEPA further accelerates Europe’s financial integration. It removes barriers to credit transfers and direct debits which will no longer impede businesses or consumers.”

EU ADOPTS CENTRAL SECURITIES DEPOSITORIES (“CSDs”) REGULATION (“CSDR”)

The EU has published the CSDR in the Official Journal of the EU with the aim of improving safety in the securities settlement system and open the market for new CSDs.

The regulation introduces a harmonisation of settlement periods, a uniform licencing approach to CSDs (including a passporting mechanism), and a number of key recording requirements.

The regulation came into force on 17 September 2014, although elements of the act will not have effect until 2023 and beyond.