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EBA Guidelines on Remuneration
Consultation paper on draft guidelines on remuneration for MiFID investment firms
On 4 March 2015, the European Banking Authority (EBA) published a consultation paper (Consultation Paper) on its draft Guidelines on sound remuneration policies (Guidelines)
The Guidelines provide guidance on the remuneration principles set out in the Capital Requirements Directive (CRD IV). They affect credit institutions and investment firms (ie, firms that fall within the scope of the Markets in Financial Instruments Directive (MiFID), including all their subsidiaries - even if those subsidiaries are not themselves subject to the CRD IV framework. They require those institutions to apply sound remuneration policies to all staff, and to impose specific requirements for the variable remuneration of staff whose professional activities have a material impact on the institutions’ risk profile (Identified Staff).
The Guidelines identify the criteria necessary to allocate remuneration components into either fixed or variable pay. They also supplement the EBA Opinion on allowances issued in October 2014 so as to ensure compliance with the bonus cap introduced by CRD IV. In particular, the Guidelines clarify the processes for recognising Identified Staff. Specific guidance outlines the calculation of elements which affect the bonus cap, including the ratio between fixed and variable remuneration, allowances, sign-on bonus, retention bonus and severance pay.
In line with the view of the European Commission and the text of CRD IV, the Guidelines require all affected institutions to employ ‘deferral’ and ‘payment of instruments’ in their remuneration policies. The EBA is of the view that specific exemptions could be introduced for certain institutions that do not rely extensively on variable remuneration and for Identified Staff who receive a low amount of variable remuneration. The EBA is particularly asking for respondents to the Consultation Paper to provide input on this aspect, as it wishes to suggest legislative amendments to the European Commission that would allow for a broader application of the proportionality principle on these aspects.
The FCA published a related statement encouraging firms to consider the Guidelines and their likely impact on affected businesses, and to respond to the Consultation Paper, notwithstanding that the Guidelines are still in draft form. According to the statement, the FCA prudentially regulates approximately 1,000 firms under CRD IV and it applies the proportionality principle to the smaller of these firms. Echoing the sentiment of the EBA, the FCA highlights that the Guidelines as currently drafted would effectively remove the proportionality principle for smaller firms. CRD IV grants member states the flexibility to apply the requirements in a proportionate way, including those relating to remuneration. The FCA describes this as "as an important part of the [CRD IV] Directive" which "helps to manage the impact on smaller firms".
EBA will host a public hearing at their premises on 8 May 2015, in advance of the 4 June 2015 deadline for submitting responses to the Consultation Paper. Competent Authorities across the EU must notify whether they intend to comply with the Guidelines. If they do not intend to comply, they must explain their decision. Competent Authorities are expected to implement the Guidelines by the end of 2015. Affected institutions must start applying the Guidelines from the performance year 2016.