On 28 July 2016, the European Commission published a report on its review of the remuneration rules for banks and large investment firms under the CRD IV framework, which focuses in particular on:

  • the efficiency, implementation and enforcement of the remuneration rules, including gaps and inconsistencies resulting from the application of proportionality; and
  • the impact of the “bonus cap” on competitiveness, financial stability and staff working in third country subsidiaries of EEA firms.


The report follows the publication of the final European Banking Authority (EBA) guidelines on the remuneration rules under CRD IV last December, which were published along with an opinion on the application of proportionality (see our alert on this here).

Given that the new EBA guidelines took a different approach to the application of the principle of proportionality than previous guidelines prepared under the preceding CRD III regime (not permitting proportionality to be used to disapply completely some of the more onerous remuneration rules, in contrast to what some Member States, including the UK, currently allow) the EBA suggested in its opinion that CRD IV be amended to provide for limited explicit exemptions.

However, the EBA did not propose any exemption from the much maligned "bonus cap", leading the UK regulators to state that they would retain the current approach of not requiring smaller firms to apply the set ratio of fixed to variable remuneration, but instead allowing them to determine an appropriate ratio for their business.

The Commission’s findings

Unsurprisingly, the Commission’s report largely cements the EBA position (which itself came about after clarification was sought from the Commission). It finds that the remuneration rules are generally effective and, as intended, many of the rules help curb excessive risk-taking and better align remuneration with performance.

The Commission’s review did, however, find that the requirements relating to deferral and pay-out in instruments can be excessively costly and are not efficient for smaller firms or staff with low levels of variable remuneration, and that listed firms face difficulties in paying out variable remuneration in shares, thereby supporting the EBA’s proposed exemptions. Despite these conclusions, the Commission has not commented on the EBA’s proposed legislative amendments at this stage.

Instead, the Commission stated that it will first carry out an impact assessment and will then consider proposing legislative amendments to CRD IV. However, this will not be imminent, as the Commission is proposing that this work will link in with its wider review of the CRD IV package planned for the end of 2016.

This means that without further intervention the new EBA guidelines, which come into effect on 1 January 2017 and do not permit the complete disapplication of any of the remuneration rules, will apply before amendments are made to provide for explicit exemptions. This could put smaller firms in a difficult position in terms of working out what is acceptable practice pending decisions being made on the appropriateness and calibration of these exemptions.

The Commission avoided reaching any firm conclusions on the suitability of the CRD IV remuneration rules for investment firms and on the impact of the bonus cap, citing a lack of appropriate data. Therefore, no suggestions for change have been made in respect of these aspects of the regime.

The Commission found that it is too early to assess fully and appropriately the effects of the bonus cap, although it did emphasise that this only reflects its findings to date, meaning that there is potential for the impact to be assessed more comprehensively in future (although whether that would yield a different result is questionable). The Commission also noted that it may revisit the application of the remuneration rules to investment firms once it has finalised its separate work stream reviewing the prudential regime for such firms.

Implications for other sectors

Although the report only relates to the remuneration rules under CRD IV, the Commission’s assessment is relevant to other sectoral remuneration rules. Earlier this year the European Securities and Markets Authority wrote to the EU legislative bodies to request clarification regarding the application of proportionality in the remuneration rules for fund managers in light of the developments under CRD IV (see our earlier alert). The Commission has stated that it will examine the implications of its findings under the CRD IV regime for the remuneration rules in the AIFMD and the UCITS Directive, although it made no commitments as to the timing of this.

What about Brexit?

Despite the Brexit decision, the remuneration rules under various European sectoral regimes will remain applicable for the foreseeable future and so remain very relevant for UK firms. Even if in future the UK is no longer strictly obliged to apply and enforce EEA standards in relation to remuneration, UK firms that are part of groups based in the EEA will still have to comply, and any desire for the UK to move away from the EEA position (for example, by scrapping the bonus cap) would need to be balanced against the impact this could have on equivalence assessments and access to EEA markets.