04 March 2014

Commission adopts new standards to increase transparency over bankers' pay and risk profiles

These standards identify risk-takers in banks and investment firms. This matters because the risk takers are the people who have to comply with EU rules on variable remuneration (including bonuses). These standards supplement the requirements of the Capital Requirements Directive (CRD IV) which entered into force on 17 July 2013 (see MEMO/13/690), and which strengthened the rules regarding the relationship between the variable (or bonus) component of total remuneration and the fixed component (or salary). For performance from 1 January 2014 onwards, the variable component shall not exceed 100 per cent of the fixed component of the total remuneration of material risk takers. Under certain conditions, shareholders can increase this maximum ratio to 200 per cent.

These RTS were developed by the EBA and have now been endorsed by the European Commission. Their endorsement strengthens the harmonised rules applicable to the remuneration of staff in banks and investment firms within the European Union (EU). They set out a methodology for identifying material risk takers that is consistent across the EU and based on a combination of qualitative and quantitative criteria and will have to be applied by all institutions subject to CRD IV. It is all about making the rules on remuneration work in reality.

Internal Market and Services Commissioner Michel Barnier said: "Some banks are doing their utmost to circumvent remuneration rules. The adoption of these technical standards is an important step towards ensuring that the capital requirement rules on remuneration are applied consistently across the EU. These standards will provide clarity on who new EU rules on bonuses actually apply to, which is key to preventing circumvention. In addition, the European Banking Authority has a mandate to ensure consistent supervisory practices on remuneration rules among competent authorities. The Commission will remain vigilant to ensure that new rules are applied in full."

Key elements of the technical standards adopted today

As a general principle, staff shall be identified as having a material impact on the institution's risk profile if they meet one or more of the criteria set out in the technical standards. These include:

• A set of 15 standard qualitative criteria related to the role and decision-making power of staff members (e.g. they are a member of the institution’s management body, a senior manager, or they have the authority to commit significantly to the institution’s credit risk exposures, etc.)
• Standard quantitative criteria related to the level of total remuneration of the staff member concerned in absolute or relative terms. In this respect, staff not caught by any of the qualitative criteria should still be identified as material risk takers if:
  • their total remuneration exceeds €500,000 per year, or
  • they are included in the 0.3 per cent of staff with the highest remuneration in the institution, or
  • their remuneration is equal or greater than the lowest total remuneration of senior management and other risk-takers.

The RTS allow institutions to rebut the presumption that individual staff members are material risk takers if identified solely by virtue of the quantitative criteria referred to above, under very strict conditions and always subject to supervisory review. In this respect:

• for members of staff with a total remuneration of €500,000 or more, any rebuttal of the presumption that the member of staff is a material risk taker needs to be notified to the competent authority
• for staff with a total remuneration of €750,000 or more, or for staff included in the 0.3 per cent of the highest earners, prior approval from the competent authorities is required
• for staff with a total remuneration of €1,000,000 or more, competent authorities need to inform the EBA of any intended approval before the decision is made. In each case, the burden of proof will rest squarely on the institutions to demonstrate that, despite the very high remuneration, the staff member in question does not in fact have any material impact on the institution's risk profile, on the basis of the business unit they are working in, as well as of their duties and activities.

What’s next?

The European Parliament and the Council have one month to exercise their right of scrutiny, with the possibility to extend this period for a further two months at their initiative. Following the expiry of this scrutiny period, the RTS will be published in the Official Journal of the European Union and will enter into force on the 20th day following the date of their publication. As with any other EU Regulation, their provisions will be directly applicable (i.e. legally binding in all Member States without implementation into national law) from the date of entry into force.

Press release

Regulation

Further information on the-RTS

CRD-webpage

Risk of backlash from EP

Bloomberg reports that the proposals risk provoking a backlash from the European Parliament, which led demands for a clampdown on bankers’ pay. The criteria “are too lax especially at a time when shareholders don’t have enough control and bankers aren’t exercising restraint", Philippe Lamberts, a Belgian lawmaker in the EU assembly, said in a telephone interview. Members of the EU parliament haven’t yet had a chance to discuss and coordinate their position on the draft standards, Lamberts said.

Given the flexibility handed to financial regulators, “I urge them to exercise this power with caution and err on the side of preventing excessive risks", Arlene McCarthy, a UK member of the parliament’s socialist group, said in an e-mail. “Regulators need to have in place robust criteria for assessing risk so that nobody falls out due to weak oversight. They must ensure that they have genuinely captured all risk-takers within their criteria", said McCarthy, the parliament’s lead legislator on a previous round of EU bonus rules.

Philippe Lamberts calls on Commission to take UK to court

Meanwhile, the Guardian reports that Philippe Lamberts, one of the architects of the EU's cap on bankers' bonuses has called for the UK government to be sued for allowing banks to sidestep the new rules, as two more UK high street banks were preparing to hand their bosses up to £1 million in extra pay to avoid the clampdown.

Lamberts, who helped devise the restrictions, said it was clear the UK was failing to implement EU law: "To me it is clear that it doesn't act. And I think the best example of that is when a bank is 80 per cent owned by the British government and they are not acting. To me they have no appetite for really going after absurd remuneration packages." He urged the Commission to take the UK to court for allowing bankers to bend the rules which limit bonuses to 100 per cent of salary or 200 per cent if shareholders approve.

"What we are witnessing now is an attempt by the major banks, with the support of the British government, to circumvent the rules and that is to compensate what we did on terms of structure, by just raising the fixed rate of remuneration”, said Lamberts.

The chancellor, George Osborne, is challenging the bonus cap in the EU's highest court because it will push up the amount of fixed pay but Lamberts said he was not worried about losing because the UK government argument that the caps are illegal was based on "fragile" logic. "People like David Cameron and George Osborne are part of the same club. These are people who are really out of touch with reality. They are part of the same class, so I think it is natural for them to defend their interests."

According to the Telegraph, BoE governor Mark Carney says the Prudential Regulation Authority will soon begin to seek comments from banks on updates to its remuneration code that could lead to even vested bonuses being returned. It might also strengthen claw-back rules by extending the coverage period to five years.

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