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European Commission proposes amendments to Capital Requirements Directive V and Capital Requirements Regulation II

An analysis of the EC’s proposed amendments to CRD V and CRR II

Banking alert | 25 November 2016

Introduction

As part of a package of reforms designed to complete and fine-tune the reform of the financial services sector, the European Commission has published its proposals for amendments to the Capital Requirements Directive and Capital Requirements Regulation.

In doing so, the Commission has confirmed its approach to the application of the principle of proportionality on remuneration, both at an individual and a firm-wide level, and its acceptance of the use of share-linked instruments by listed firms.

Overview

Affected Firms

Credit institutions and investment firms subject to CRD IV        

Timing

Uncertain - subject to negotiation and the EU legislative process

 

Analysis

From a remuneration standpoint, there are three key amendments to note:

(1) Disapplication of rules on deferral, payment in instruments and discretionary pension benefits, with no disapplication of the bonus cap or rule on malus and clawback

The Commission has proposed that the text of CRD IV be amended so as to allow for the rules on deferral and payment in instruments (as well as the provision relating to the use of instruments for discretionary pension benefits) to be disapplied by small, non-complex institutions and by staff receiving low levels of variable remuneration.

Specifically, the proposed amendment would allow these rules to be disapplied by:

(a) Firms which have assets of an average value equal to or less than €5 billion over the four year period immediately preceding the current financial year; and

(b) Individuals whose annual variable remuneration does not exceed €50,000 and whose variable remuneration does not represent more than 25% of the individual’s annual total remuneration.

The proposed amendment would give national regulators the power to require firms to apply the above rules even if they or their individual staff members fell below the thresholds above. The Commission envisages that national regulators may consider that a stricter approach is necessary on account of the nature and scope of the firm’s activities, its internal organisation or the characteristics of the group to which the firm belongs or, in the case of an individual, due to the nature of his or her responsibilities and job profile.

The amended text also provides for the European Banking Authority (EBA) to adopt new Guidelines in order to facilitate the above approach to proportionality and to ensure consistent application across the Member States.

The proposed disapplication of the rules on deferral and payment in instruments (as well as the provision relating to the use of instruments for discretionary pension benefits) is in line with the Opinion on the application of proportionality published by the EBA in December 2015 and therefore was widely anticipated. It is clear that the Commission intends for there to be no disapplication of the bonus cap and no disapplication of the rule on malus and clawback, regardless of the size of the firm and the level of an individual's pay.

What was less anticipated, however, was the hard-wiring into the Directive text of the set thresholds for the disapplication of these rules at a firm-wide and individual level.

In consequence, if the amendments are implemented in the form proposed, it is likely that there will be a significant increase in the number of firms and individuals subject to the rules on deferral and payment in instruments, and all firms and individuals will need to be subject to the bonus cap and the provision on malus and clawback.

(2) Use of share-linked instruments by listed firms

The Commission’s proposed amendments would remove the current restriction on listed firms using share-linked instruments to satisfy the payment in instruments requirement.

The Commission has highlighted that its review of the CRD IV remuneration rules indicated that, not only were there some impediments for certain listed firms using shares as part of variable pay, phantom share awards can be as effective as shares in terms of aligning the interest of staff members with those of shareholders and with the long-term interests of the institution, provided that they closely track the value of the shares.

(3) Disclosure

The Commission has also proposed amendments to the remuneration disclosure requirements in the CRR to include an express requirement for firms to disclose information on whether they benefit from proportionality on the basis set out in CRD V.

Timing and further details

Based on past experience, for EU legislation of this extent and complexity, it could take around two years for these proposals to be negotiated, amended and published in final form in the Official Journal.

The Commission’s proposals can be found here: Proposals to amend rules on capital requirements.

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