CRD 4: Remuneration and Proportionality

As may be recalled, the consultation paper issued by the EBA on ‘Sound Remuneration Policies’ (CP 2015/3) closed on 4 June 2015 – see Regulatory Roundup 65 for a summary.

After due consideration of responses to the consultation, the EBA has published its final Guidelines on sound remuneration policies under CRD 4 (EBA/GL/2015/22).

Chapter 6, page 112, includes a summary of responses to the consultation that were received together with the EBA’s analysis and, where relevant, details of amendments to the original proposal.

Of the 127 responses received, it probably will not come as a surprise to learn that most respondents did not agree with the change in approach to the concept of proportionality from the previous remuneration Guidelines issued by CEBS, the EBA’s predecessor, on 10 December 2010. The EBA consultation paper was of the view (which, to be fair, was a view that was subsequently confirmed by the European Commission) that, whilst the provisions of the Directive on remuneration should be proportionate to e.g. the size of the firm or (lack of) complexity, the CRD 4 framework did not permit any exemptions or waivers to the application of the remuneration principles.

With such interest in this area, the EBA has submitted its opinion on the application of the principle of proportionality to the European Commission in parallel with the publication of the Guidelines.

Interestingly the opinion informs us that 21 Member States have implemented waivers in line with CEBS Guidelines for e.g. small institutions – waiver of the requirements to defer part of the variable remuneration and for the payment of part of the variable remuneration in instruments are mentioned. A ‘few Member States’ are also reported to have waived the 100% variable/fixed ratio cap (CRD Article 94(1)(g)). Not unnaturally, the EBA is concerned to establish a more harmonised approach to the remuneration requirements across Member States as well as providing legal clarification on the application of those requirements in accordance with the proportionality principle under CRD 4 (as opposed to the CEBS Guidelines).

It is the EBA’s view that this harmonised approach should take the form of legislative amendments to the CRD (2013/36) to:

  • exclude certain small, non-complex institutions from the requirements to apply the remuneration principles regarding deferral and payment in instruments for variable remuneration;
  • limit the scope of those principals as regards staff who receive low amounts of variable remuneration, including in large institutions; and
  • allow listed institutions to use share-linked instruments.

Annex I of the opinion document sets out the drafting proposals, including the all-important changes to Article 94 which will address the issues in the three bullet points above. Note that the proposed removal of the wording “and to the extent” (the interpretation of which was, no doubt, the source of the differing approaches by Member States as mentioned above) from Article 92 removes any doubt about the need for all institutions to comply with all the remuneration principles, subject only to exemptions specifically set out in the Directive.

A statement issued by the FCA advises “As with all ESA guidelines, there are implementation processes for competent authorities to which we will respond in due course. The FCA, in conjunction with the PRA and HMT, will review the changes proposed by the Guidelines and their application to the UK market, and will consult on any necessary changes to our domestic rules and guidance”.

Note that the guidelines will apply from 1 January 2017 and the rules will first apply to the 2017 performance year – firms will not need to change their existing pay practices for the 2016 performance year.

The CEBS Guidelines on remuneration policies and practices referenced above will be repealed with effect from 31 December 2016.