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Guidance is also provided on the application of deferral arrangements and the pay-out instruments ensuring that variable remuneration is aligned with an institution's long-term risks and that any ex-post risk adjustments can be applied as appropriate.
These draft Guidelines complement the EBA Opinion on allowances issued in October 2014 by providing additional details in support of the principles formulated in it, so as to ensure compliance with the bonus cap introduced by the Capital Requirements Directive (CRD IV). In particular, the Guidelines clarify the process for identifying those categories of staff whose professional activities have a material impact on the institutions' risk profile, and do so on the basis of the criteria that were defined in the EBA Regulatory Technical Standard (RTS) on identified staff.
Specific guidance is provided on how the ratio between the variable and the fixed components of remuneration should be calculated, taking into account specific remuneration elements, such as allowances, sign-on bonus, retention bonus and severance pay. The document also covers pay-out processes and types of instruments used to pay variable remuneration, in line with the provisions defined in the EBA standards on classes of instruments and the combination of different categories of instruments.
On the application of proportionality to the remuneration principles, these draft Guidelines follow a legal reading of the CRD IV, supported by the European Commission, that the requirements on deferral and payment in instruments have to be applied to all institutions. On this point, the EBA is of the view that specific exemptions could be introduced for certain institutions that do not rely extensively on variable remuneration and, if confirmed by further analysis, also for identified staff that receive only a low amount of variable remuneration. To this regard, the Authority intends to send its advice to the European Commission suggesting legislative amendments that would allow for a broader application of the proportionality principle and is, therefore, asking all interested parties to provide input on this aspect.
The EBA Guidelines will apply to competent authorities across the EU, as well as to institutions on a solo and consolidated basis, including all subsidiaries which are not subject to the CRD IV framework. Once the new Guidelines will be enforced, the previous Guidelines on remuneration policies and practices from 2010 will be repealed.
Comments to this consultation can be sent to the EBA by 4 June 2015. A public hearing will take place at the EBA premises on 8 May 2015 from 13:30 to 16:00 UK time.
The EU has made another attempt to curb the remuneration of asset managers and executives working for small banks and building societies, triggering “major concerns” in London financial circles and potentially setting the UK on a collision course with Brussels.
The European Banking Authority, the EU’s banking watchdog, wants to remove national waivers used to exempt some financial companies from rules brought in to reform banker pay in the aftermath of the financial crisis so executives had no incentive to take excessive risks.
The rules, introduced last month, cap key staff bonuses at twice their fixed salary and require at least 40 per cent of bonuses to be deferred for at least three years. In the UK, standalone asset management companies and personnel at small banks have waivers from the Financial Conduct Authority.
In its guidelines on remuneration policies published on Wednesday, the EBA also said it wanted the bonus rules to be applied in all bank-owned subsidiaries, even the ones not usually subject to banking regulations.
“The biggest surprise is the indication that some smaller banks and investment firms which have, to date, been able to disapply the bonus cap for proportionality reasons, may not be allowed to do so,” said Alex Beidas of law firm Linklaters.
However the UK’s official response to the rules left open the possibility that they may not be transposed into UK law in their current form, with the Treasury saying it was for Britain’s regulators “to decide how and to what extent the EBA’s final guidelines are incorporated into Britain’s existing rules on bankers’ pay, which are already the toughest of any major financial centre.”
Tom Gosling, a London-based partner at PwC, said the proposals to draw more companies into the net “will cause major concern in the City”.
“On the face of it the EBA seems to be saying that all firms covered by the directive will be subject to bonus cap and deferral rules, drawing in a huge number of firms,” said Mr Gosling.
“It seems certain that there will be moves to rebut this conclusion during the consultation period.” The EBA is embarking on a three-month consultation period, and hopes to have the rules in force by the end of 2015.
The EBA is relying on the EU’s 28 countries to make sure financial companies comply with the rules. National regulators could also choose to either ‘explain’ their country’s non compliance or to ‘partially comply’. If compliance is poor, the EBA could ask Brussels to pursue national regulators in the European courts.