The PRA and FCA notified the European Banking Authority (EBA) that they will comply with all aspects of the EBA’s Guidelines on Sound Remuneration Policies issued on 21 December 2015, except for a guideline stating that the bonus cap introduced under the new Capital Requirements Directive (CRD IV) must be applied to all institutions subject to that directive and may not be disapplied on the basis of proportionality.
The bonus cap was introduced in the remuneration restrictions included in CRD IV, which came into effect on 1 January 2014 and applies to all EU banks and credit institutions and to certain MiFID investment firms (categorised as IFPRU Firms under the FCA rules). The new bonus cap requires CRD IV institutions to restrict any award of variable remuneration (i.e. a bonus) to a maximum of no more than 100% of the employee’s fixed remuneration (e.g. salary). This limit may be increased to a maximum of 200% with the approval of the institution’s shareholders.
However, in their guidance on the application of proportionality under their CRD IV remuneration codes, both the PRA and FCA had taken the position that the bonus cap could be disapplied on the basis of proportionality in certain cases.
As indicated above, the position taken by the EBA on this point in its December 2015 guidelines is contrary to that taken by the PRA and FCA. However, under the EU regulation establishing the EBA (No. 1093/2010), EBA guidelines of this sort are only issued to national regulators on a “comply or explain” basis. Specifically, within two months of the EBA’s issuance of a guideline, each national regulator is required to “confirm whether it complies or intends to comply with that guideline … [and in the event that a national regulator] does not comply or does not intend to comply, it shall inform the [EBA], stating its reasons.”
On the basis of their notice therefore, the PRA and FCA may continue to disapply the CRD IV bonus cap on the basis of proportionality, notwithstanding the position taken by the EBA.