On October 15, 2014, the European Banking Authority (“EBA”) issued the findings of its investigation on discretionary remuneration practices across the EU banking sector in the form of a report and opinion. The EBA’s findings indicate that some firms use categorized role-based allowances in a way that can increase the fixed component of remuneration, and this allows for greater amounts of remuneration within the bonus cap. The EBA has requested that national supervisors ensure that the remuneration practices of firms on allowances comply with the Capital Requirements Directive and Capital Requirements Regulation (“CRDIV”).

The report states that 39 firms use role-based allowances that they classify as   fixed remuneration. The EBA found that in most of these cases, firms had increased this fixed remuneration and introduced discretionary role-based allowances, which have had a bearing on the ratio between variable and fixed remuneration. In the opinion of the EBA, for a role-based allowance to be categorized as fixed remuneration, it must: (i) be predetermined; (ii) be permanent (i.e., maintained over time for the specific role and organizational responsibilities for which the allowance is granted); (iii) not provide incentives for risk-taking;(iv) be without prejudice to national law; and (v) be non-revocable. In addition,  the allowance must not be subject to variations over time, other than by agreement between the parties (or as otherwise provided by applicable national law).  National regulators have until December 31, 2014 to ensure firms reassess their remuneration policies to be compliant with the criteria highlighted in the EBA report and with CRDIV. For more details, you may like to read our client note at:

http://www.shearman.com/en/newsinsights/publications/2014/10/european-banking-authority-report.

The EBA’s report is available at:

http://www.eba.europa.eu/documents/10180/534414/EBA+Report+on+the+principles+on+remuneration+policies+and+the+use+of+allowances.pdf

and the EBA’s opinion is available at:

http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014 10+Opinion+on+remuneration+and+allowances.pdf.