On May 14, 2015, the European Banking Authority published letters between itself and the European Commission which address the issue of application of the proportionality principle to the requirements under the EU Capital Requirements Directive and Capital Requirements Regulation. The proportionality principle states that firms should implement the remuneration provisions in a manner and to the extent that is appropriate to the firm’s size, internal organization and the nature, scope and complexity of its activities. The EBA wrote to the Commission on January 8, 2015, requesting views on the approach that the EBA should adopt to interpreting the proportionality principle in its guidelines on sound remuneration policies. The EBA’s letter pointed out that on a legal interpretation of CRD IV and CRR the remuneration principles must be applied proportionately, but that there was no room for any waiver for small or non-complex firms. However, the EBA noted that a waiver might be justified on policy grounds for small and non-complex firms because variable remuneration paid is low and the incentives for employees to take risks is low. The cost of implementing the requirements would however, be significant for such firms. The response from the European Commission confirmed that the EBA should follow its legal interpretation and that to do otherwise would be to take a policy decision, which is outside of its powers. The EBA launched its consultation on draft guidelines on sound remuneration policies on March 4, 2015 in which it adopts the approach suggested by the Commission. Responses to EBA’s consultation are due on June 4, 2015. A review of the remuneration requirements under CRD IV is required to be undertaken by the EBA and the Commission and a report should be submitted to the European Parliament and Council, together with a legislative proposal if appropriate, by June 30, 2016. Any amendments to the current requirements may result in firms having to amend their remuneration policies, potentially adding to the costs for small and non-complex firms.

The EBA letter is available at: http://www.eba.europa.eu/documents/10180/1073529/2015+01+08+%28Letter+to+Ms+Michou+DG+Justice+on+Proportionality %29.pdf/838642d8-6a1f-442f-8cb6-23eaf4ba9649 and the Commission’s response is available at: http://www.eba.europa.eu/documents/10180/1073529/2015+02+23+%28Response+EU+COM+re+proportionality%29.pdf/14888 706-e787-4efb-bf41-460cd0dd0f0e