Remuneration: Bonus Cap

Of Relevance to:
Firms subject to CRD IV (‘IFPRU Investment Firms’)

Remuneration: Bonus Cap

The European Banking Authority’s Guidelines on sound remuneration policies were published on 21 December last year. The Guidelines will apply from 1 January 2017 and as such the current CEBS Guidelines will be repealed with effect from 31 December 2016 – see Regulatory Roundup 72.

The EBA Guidelines are addressed to both institutions and competent authorities, with the latter being required to report to the EBA on whether they will comply with the Guidelines.

The FCA and PRA have issued a joint statement to the effect that they will comply with all aspects of the EBA Guidelines except those relating to the ‘bonus cap’.

The bonus cap is the expression given to Article 94(1)(g) of the Capital Requirements Directive (2013/36) which requires that the variable component of a person’s remuneration (the FCA Handbook refers to such persons as ‘Remuneration Code staff’) shall not exceed 100% of the fixed component of the total remuneration for that person (the figure can be increased to 200% subject to shareholders’ approval) – see Regulatory Roundup 70 for further information.

As was mentioned in Regulatory Roundup 70, the view of the EBA is that while it is appropriate to apply proportionality to the remuneration principles within CRD IV, the concept of ‘proportionality’ did not permit any exemptions or waivers from those principles.

The FCA and PRA do not agree with this interpretation and are of the view that ‘proportionality’ may well include not applying a remuneration principle in its entirety.

The FCA and PRA require all large and systemically important IFPRU firms to continue to apply the bonus cap, and will retain the current approach of requiring smaller firms to determine an appropriate ratio between fixed and variable remuneration for their business whilst not applying the bonus cap. Although not spelled out in the statement, ‘smaller firms’ will presumably be those that fall within ‘proportionality level three’ – see the FCA Guidance on proportionality to determine a firm’s ‘proportionality level’.

Interestingly, the statement confirms that both Regulators consider that the CRD proportionality principle applies equally to all numerical requirements including, and aside from the bonus cap, deferral, payment in instruments and ex-post risk adjustment.

We are informed that the FCA and PRA are considering whether any rule changes are required to implement the Guidelines and, if necessary, will consult in due course.

Key Dates

  • 1 January 2017: EBA Remuneration Guidelines (subject to FCA and PRA interpretation) replace the current CEBS Guidelines.