Most of the recent attention given to remuneration in the banking sector has been focused on the introduction of the cap on bonuses through provisions in CRD IV. However, there are also separate proposals to extend the number of individuals who are caught by the tougher aspects of the European remuneration guidelines for banks and building societies, which may actually end up being a more important development.

In summary, it is proposed that far more individuals will be caught by compulsory minimum deferral and share payment rules because of the greater number of roles automatically being brought within the definition of Identified Staff (or the UK term Code Staff) and tougher de minimis rules.

These proposals do not involve the need for member state or national regulator comment which EU remuneration proposals have received to date. This Law-Now explores what the proposed changes, which will no doubt be subject to fierce lobbying, would involve.

Current position

The Guidelines on Remuneration Policies and Practices published by the Committee of European Banking Supervisors, (“CEBS”), (now the European Banking Authority (“EBA”)) in December 2010 contained guidelines for determining which individuals were “Identified Staff” but left it to local supervisors to determine their own rules and how they should be implemented.

In the UK, remuneration in banks and building societies (and relevant investment firms) is governed by the Remuneration Code which is based on the CEBS Guidelines. This defines Code Staff as “including senior management, risk takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the firm’s risk profile”. This broadly follows the definition set out in the CEBS Guidelines. The Remuneration Code currently includes extra guidance using examples of staff who may well, depending on the circumstances, be treated as Code Staff. However, it is for individual firms to draw up their own list of Code Staff and be able to justify why it has been drawn up that way.

For staff caught by the existing definition, the Remuneration Code says that certain rules (for example those relating to deferral and share components) can be disapplied if their total remuneration does not exceed £500,000 and their variable remuneration does not exceed 33% of their total remuneration, although importantly that does not mean that they cease to be Code Staff.

Proposed new rules

The EBA has published draft regulatory technical standards (“RTS”) for consultation which, if adopted, will result in more individuals being classified as Identified Staff/Code Staff under the UK’s Remuneration Code.

The new rules are expected to be finalised in early 2014, although it is not clear when they would take effect. Determining who are Code Staff is important because the strictest remuneration provisions in what is currently CRD III and, going forward, CRD IV, only apply to Code Staff. The RTS are being introduced to harmonise the definition of Identified Staff across the EU, following concerns that practice varied significantly between Member States and firms and failed to catch all relevant staff, but they operate to increase rather than reduce the number of staff caught.  The RTS will codify the rules for determining Identified Staff. As they will have direct effect, there will be limited scope for local determination or variation.

The RTS themselves make no changes to the remuneration rules which apply to Code Staff, as the new bonus cap is being implemented separately.

The draft RTS provide that an individual will be treated as Code Staff if they satisfy one or more of the following criteria:

  1. Internal criteria established by a firm to identify material risk-takers;
  2. Qualitative criteria which seek to identify those staff who are involved in management and/or have authority to expose the firm to credit risk exposures and market risk transactions above certain thresholds; or
  3. Quantitative criteria based on an individual’s total remuneration, both in absolute and relative terms.

Staff who meet any of the above criteria will automatically be Code Staff, except in very limited circumstances (see “de minimis exception” below).

Internal criteria

Firms will continue to be required to develop their own internal policy for determining which staff are Code Staff, which should take into account the firm’s specific risk profile and should operate in addition to the qualitative and quantitative criteria. In particular, the firm should take into account:

  • the size and internal organisation of the firm;
  • the nature, scope and complexity of the firm’s activities;
  • the extent to which the professional activities of staff could have a material impact on the firm’s annual financial results or balance sheet; and
  • the need for criteria to apply at different levels within the firm, including parent, subsidiary and overseas entities.

Qualitative criteria

The qualitative criteria seek to identify those individuals who have a material impact on an institution’s risk profile. An individual will be deemed to have a material impact on the firm’s risk profile if they:

  1. are a member of the management body;
  2. are a member of senior management;
  3. are responsible and accountable to the management body for the internal risk control function, compliance function or internal audit function;
  4. head a business unit – ie any separate organisational or legal entities, business lines or geographical locations;
  5. head a function responsible for legal affairs, tax, HR, IT, budgeting, economic analysis or business continuity planning;
  6. individually or collectively with other staff members, have authority to commit to credit risk exposures of a nominal amount per transaction representing 0.25% of the firm’s Common Equity Tier 1 capital;
  7. individually or collectively with other staff members, have authority to commit to transactions on the trading book which in aggregate represent either:
    1. where a standardised approach is used, an own funds requirement for market risks of 0.25% or more of the firm’s Common Equity Tier 1 capital; or
    2. where an internal model based approach is used, 5% or more of the firm’s internal value-at-risk limit for trading book exposures at a 95th percentile, one-tailed confidence interval level.

This criterion does not apply to small firms that do not have to apply the trading book rules;

  1. have managerial responsibility for a group of staff members who have individual authorities to commit the firm to transactions that, in aggregate, equal or exceed the thresholds in (f) or (g) above;
  2. have managerial responsibility for an individual who is Code Staff; or
  3. individually or collectively with other staff members, have authority to take, approve or veto decisions on the introduction of new products, material processes or material systems.

The reference to individuals acting individually or collectively is intended to ensure that both individuals who are responsible for advising on, or initiating, commitments or decisions and those who are members of a committee which has authority to make such commitments or take such decisions are caught.

The criteria in (a), (b), (c) and (e) are broadly in line with current guidance in the Remuneration Code, although such staff will now automatically be caught without showing that they have a material impact on the firm’s risk profile. The remaining criteria are new and so may catch individuals who are not already treated as Code Staff.

Quantitative criteria

The quantitative criteria is based on an individual’s remuneration, both in absolute and relative terms. Individuals will be deemed to have a material impact on the firm’s risk profile if they meet one of the following four tests:

  1. they could, under the firm’s remuneration policy, have variable remuneration that exceeds (i) 75% of their fixed remuneration and (ii) €75,000;
  2. they have been awarded total gross remuneration in one of the two preceding financial years which is equal to or greater than the lowest total remuneration awarded to a staff member who works for the same firm and meet either the qualitative criteria or is Code Staff as a result of the firm’s own internal criteria;
  3. they have been awarded total gross remuneration of €500,000 or more in one of the two preceding financial years; or
  4. they are within the 0.3% of staff who receive the highest total gross remuneration in either of the two preceding financial years.

Remuneration which has been awarded but not yet paid is valued at the date of the award, without any discount or reductions for deferral, clawback etc and for part-timers is determined on a full-time equivalent basis.

De minimis exception

The draft RTS allow a de minimis exception to be applied where an individual is Code Staff only because the individual satisfies either (a) or (b) of the quantitative criteria above (but note if they meet (c) or (d) of the quantitative criteria, the de minimis exemption cannot apply). Where (a) or (b) apply, the firm can choose not to treat the individual as Code Staff if the individual’s role and the individual himself does not have a material impact on the firm’s risk profile although it will carefully need to justify this. If the individual meets any of the other internal, qualitative or quantitative criteria they will automatically be Code Staff.

This is a much tighter restriction than currently operates in the UK. At present in the UK, certain rules can be disapplied for Code Staff if their total remuneration does not exceed £500,000 and their variable remuneration does not exceed 33% of total remuneration. Going forward, staff awarded total gross remuneration of €500,000 or more in one of the two preceding financial years (ie paragraph (c) of the quantitative criteria above) will automatically be Code Staff. UK regulatory practice and supervision of these rules will be key.

On the basis that the de minimis exemption would be built into the Code Staff definition itself, the Remuneration Code’s current framework of keeping a less highly paid Code Staff member outside the key structural remuneration constraints but within the definition of Code Staff looks likely to be revised.


The EBA is consulting on the draft RTS and responses should be provided by 21 August 2013.  The EBA intends to finalise the RTS by early 2014 and so they are likely to come into force during 2014.  Although the EBA has not yet specified when firms should comply with the new rules, it is expected that they will apply for the 2015 remuneration round, but this is not yet clear.  In the UK, neither the PRA nor the FCA has yet commented on the proposals.

Although still some way off and currently something to monitor rather than react to, firms may usefully begin reviewing their current list of Code Staff and compare this against the proposed new rules. This is to determine whether, and to what extent, staff who are not currently treated as Code Staff will be caught in future and what steps may be needed to bring their remuneration into compliance with the Remuneration Code.

For a copy of the consultation paper please click here