20 March 2015 - Post by:Felicity Gemson
Financial sector firms have had to operate CRD IV-compliant remuneration policies since 2014, but without certainty as to what the rules entail in some areas and what flexibility they permit. The European Banking Authority has finally unveiled draft guidelines with the detail and is consulting on these until 4 June 2015. Headline issues for UK-regulated firms are:
Proportionality curtailed: Level three firms would lose the ability to waive requirements relating to bonus caps, deferrals, payment in instruments, retention periods and malus and clawback on proportionality grounds and would need to restructure their remuneration arrangements to comply with these rules. The EBA has, however, indicated that its final position on proportionality will be influenced by consultation feedback and that exceptions could be introduced for firms which depend less on variable remuneration.
Removal of de minimis exception for staff: Firms would have to apply the remuneration requirements in full to all material risk-takers (“Identified Staff”), irrespective of their earnings. The EBA may decide in light of consultation feedback to introduce an exception in relation to lower-earning Identified Staff.
Staff net broadened: Financial conglomerate firms would have to identify staff in any subsidiaries outside the scope of CRD IV who have a material impact on risk profile at group level and extend CRD IV remuneration requirements to them. This could bring Identified Staff, for example, in firms’ asset management or insurance arms, within the bonus cap net, although they are not subject to a cap under specific sectoral directives (such as AIFMD and UCITS V).
Allowance criteria clarified: The EBA has formalised its opinion (issued in October 2014) that allowance structures are permissible, provided that they are properly structured. The draft guidelines develop the criteria that must be met in order for role-based allowances to be characterised as fixed pay. Firms should revisit the terms of allowance structures to ensure that they are compliant.
We are likely to see final guidelines published in the autumn requiring firms to revisit and, if necessary, amend their remuneration arrangements with effect from 2016. The guidelines are, for the most part, unlikely to change in substance as the EBA has invited comments only on their clarity; comments can be sent directly to the EBA by clicking here. In the meantime, firms don’t have to take any action yet but may wish to start planning to establish what, if any, changes will need to be made.