Remuneration under CRD 4 – Update

The consultation period in respect of the European Banking Authority’s (EBA) Consultation paper on ‘Sound Remuneration Policies’ (CP 2015/03) closed on 4 June.

The EBA will no doubt be considering all the feedback received before final remuneration guidelines are published later this year.  However in the meantime firms subject to CRD 4 remuneration principles (e.g. an investment firm subject to IFPRU) may wish to take the opportunity to familiarise themselves with the proposals in CP 2015/03 albeit that the final guidelines may not fully reflect the content.

Some areas are worth highlighting.

Previous remuneration guidelines issued by CEBS – the EBA’s predecessor- allowed for the concept of ‘proportionality’ which had the effect of disapplying certain (CRD 3) remuneration principles for less complex firms.  By way of example the principle of ‘deferral’ requires that at least 40% of variable remuneration is deferred over a period of not less than three to five years (SYSC 19C.3.49), although the concept of proportionality allows FCA guidance to the effect that “it will normally be appropriate for a BIPRU firm to disapply…” this particular rule.

It is proposed that the CEBS concept of proportionality (the paper also uses the term ‘neutralisations’) is not consistent with CRD 4.  As such the EBA is of the opinion that there is no scope for the disapplication of any remuneration principles, regardless of size of firm or (lack of) complexity.  This would mean, for example, that the principal of deferral, which is maintained in CRD 4 (Article 94(1)(m)), would have to be applied to all firms; the concept of proportionality would mean that ‘at least 40%’, say over three years, would effectively be the starting point for a firm, with more complex and larger firms needing to comply to a greater extent – perhaps by deferring more than 40% over a longer period.  In addition to CP 2015/03 please also see the links to correspondence between the EC and the EBA for further background to this issue.

The paper confirms that remuneration is either fixed or variable and that there is no third category of remuneration (para 115).  Para 117 sets out conditions for ‘fixed remuneration’ which include (but are not limited to): being predetermined; not dependent upon performance; and payments cannot be reduced, suspended or cancelled.  Therefore, by definition, any payment not meeting those conditions, and which presumably could include dividends or similar distributions that partners receive as owners of the investment firm,  will be ‘variable remuneration’ and potentially subject to e.g. the above mentioned deferment principle or possibly clawback (‘performance adjustment etc.’). When the AIFMD was rolled out, ESMA provided guidelines (2013/232) to the effect that distributions paid to persons in their capacity as owners was not subject to the AIFMD remuneration guidelines; there is no similar approach in the EBA paper as it currently stands.

The paper has resulted in a healthy number of responses including The Investment Association and the British Bankers Association and can be viewed by way of the link provided.

Firms should bear in mind that on the face of it the FCA guidance on proportionality for CRD 4 entities (para 29 advises “that it may not be necessary for certain firms to apply certain remuneration principles at all”) is not entirely consistent with the above.

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