The European Banking Authority has issued its hotly anticipated investigation report on whether the use of ‘role-based’ allowances by certain financial institutions and their classification by those institutions as fixed rather than variable remuneration is compatible with the Capital Requirements Directive and the bonus cap on variable remuneration.
The Report (which can be found here) was carried out at the request of the European Commission. The Report concludes that most of the characteristics of role-based allowances are typical of variable not fixed remuneration, particularly the discretionary elements.
In order properly to be classified as fixed remuneration, the EBA has stated that role-based allowances must meet the following conditions:
- be permanent, ie maintained over time
- be pre-determined
- be non-discretionary
- be non-revocable
- be transparent to staff
The Report states that the EBA expects institutions to reclassify any discretionary role-based allowances as variable rather than fixed remuneration. At the end of its Report the EBA has issued a formal Opinion addressed to the European Commission and national regulators calling for them to ensure that financial institutions update their remuneration policies to ensure that this reclassification takes place and that the payment of any such allowances complies with the Capital Requirements Directive. The Opinion states that national regulators have until 31 December 2014 to use all necessary supervisory measures to ensure this is done.
The EBA seems to accept that there is some room for discussion on the findings of the Report – the Report notes that the EBA is working on new guidelines on remuneration (an updated version of the 2010 CEBS guidelines) and that the draft guidelines (expected to be published soon) will include the analysis and findings of the Report and will be open for public consultation. There will therefore be an opportunity for national regulators and financial institutions to contribute their views to that consultation.
The Report and Opinion are not legally binding and, while they will put pressure on the regulators to review and potentially reconsider their views on these types of allowances, many firms will want to await the outcome of the UK’s legal challenge to the bonus cap and the finalisation of the new EBA remuneration guidelines before reacting.
Since the Capital Requirements Directive is not directly applicable to EU firms (unlike its sister legislation, the Capital Requirements Regulation), the EBA cannot take direct action against any financial institution for failure to comply with its Report or Opinion.
The Commission may issue guidance or a recommendation to the Member States on what it believes is the proper interpretation of the Directive based on the Opinion. The Commission may wait to do this until it gauges the extent of national regulator reaction to the Opinion (which is required by the end of 2014) and potentially until the consultation on the new remuneration guidelines has been completed, but it would be an important step for it if later it wished to bring infringement proceedings against any Member State.
Member States will need to decide whether to respond to the Opinion or any Commission guidance or recommendation by clarifying the interpretation at a national level through guidance or legislative amendment. At this stage, if financial institutions ignore the Opinion and any subsequent national guidance, they will run the risk of national enforcement. Any national enforcement proceedings could ultimately go to the ECJ on a reference as to the interpretation of the Directive. If a Member State takes the bold step of not taking steps to enforce, the Commission may ultimately commence infringement proceedings against that Member State.
In the meantime, the Advocate General’s opinion on the UK bonus cap challenge will be presented on 20 November 2014. This could indicate the views of the ECJ on the legality of the bonus cap ahead of its decision in early 2015. For our briefing on the bonus cap challenge, click here.