Some credit institutions and investment firms may no longer need to pay a proportion of variable remuneration in instruments or defer the payment of remuneration under Directive 2013/36 ("CRD IV"). This follows from a policy statement ("Statement") issued by the Central Bank of Ireland on 31 January 2017.
As set out in more detail in our previous briefing (here), CRD IV imposes a number of remuneration requirements on credit institutions and certain investment firms ("Institutions"). These include requirements governing the "payout process" which relate to deferral arrangements, payment in instruments and the application of malus arrangements. An Institution is expected to comply with these requirements in a manner and to the extent that is appropriate to its size, internal organisation and the nature, scope and complexity of its activities. This is referred to as the proportionality principle.
Until recently, many Institutions used the proportionality principle as a basis for disapplying the remuneration requirements relating to the pay-out process. This approach was based on guidelines published by the European Banking Authority's ("EBA's") predecessor, the Committee of European Banking Supervisors (the "CEBS Guidelines")
In March 2015 the EBA consulted on new guidelines to replace the CEBS Guidelines. In that consultation, the EBA indicated that, in its view, it was not possible to rely on the proportionality principle to disapply any of the remuneration requirements. It subsequently confirmed this view in December 2015, in an Opinion addressed to the European Commission, European Parliament and Council of the EU ("Opinion"), which was published at the same time as the final version of the guidelines (the "EBA Guidelines").
In the Opinion the EBA also called for a legislative amendment to CRD IV to exclude certain small and non complex institutions from the requirements to apply the remuneration principles 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 in large institutions.
In July 2016 the European Commission published a report on the assessment of the CRD IV remuneration rules, in which it outlined a number of concerns regarding the application of the proportionality principle. Among other things, it concluded that the application of the rules on deferral and pay-out in instruments are not efficient in the case of small and noncomplex institutions and staff with nonmaterial amounts of variable remuneration.
On 23 November 2016 the European Commission published a proposal for a Directive amending CRD IV as regards, among other things, remuneration ("Proposed Directive").
With regard to proportionality, the Proposed Directive would amend CRD IV by introducing a new Article 94(3) which states that the principles set out in Articles 94(1)(l), (m) and the second sub paragraph of (o) will not apply to an Institution or staff member that meets certain thresholds. Article 94(1)(l) requires an Institution to pay a substantial proportion of variable remuneration in instruments. Articles 94(1) (m) and (o) deal with deferral arrangements generally and in relation to discretionary pension benefits, respectively.
Generally, the derogation applies to:
- an institution 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; and
- a staff member 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.
However, a competent authority may decide that the derogation does not apply to an Institution/staff member coming within the above thresholds in certain cases.
The Proposed Directive is currently being considered by the European Parliament and the Council of the EU and once it enters into force, member states will have one year in which to transpose it into national law.
The Central Bank's Policy Statement
The EBA Guidelines entered into force on 1 January 2017 and the CEBS Guidelines were repealed with effect from the previous day. The Central Bank has indicated that it intends to comply with the EBA Guidelines.
However, according to the Statement, the Central Bank’s assessment of compliance with the EBA Guidelines will be guided by the derogation thresholds set out in the Proposed Directive. Specifically, the Statement provides as follows:
“In the context of the Central Bank’s assessment of compliance with the EBA remuneration Guidelines, where firms seek to avail of the principle of proportionality in respect of the pay-out process applicable to variable remuneration (eg on the basis that they are smaller, less complex institutions and/or on the basis of the level of variable remuneration that is paid to Identified Staff ), the Central Bank’s assessment, in the context of the quantitative aspects will be guided by, inter alia, the European Commission’s thresholds in Article 94(3) of its proposal for amendments to CRD IV published on 23 November 2016.”
The Central Bank will monitor developments in the European context and consider whether an amendment is required to the approach in light of any future developments relating to the principle of proportionality in the European context.
Over the past years, a number of Institutions have relied on the proportionality principle to disapply the requirements relating to the pay-out process in line with the approach adopted in the CEBS Guidelines.
Since the EBA’s and the European Commission’s announcements that it is not possible to use the proportionality principle in this way, these Institutions have found themselves in an invidious position. On the one hand, they must change their approach to the pay-out process, including paying a portion of variable remuneration in instruments, on the basis that CRD IV does not permit the disapplication of the payout process requirements. On the other hand, it is clear that those changes would only be necessaary for a temporary period, pending the adoption and transposition of the Proposed Directive.
The Policy Statement appears to mean that Institutions that come within the derogation thresholds set out in the Proposed Directive do not need to change their approach to the pay-out process, at least for the moment, pending any further developments at EU level. In other words, the Central Bank intends to approach the application of the proportionality principle as if those derogation thresholds apply. This is an eminently sensible and welcome approach on the part of the Central Bank which will do much to alleviate difficulties being faced by Institutions and Staff falling within those thresholds.