16 June 2020
The EU’s European Systemic Risk Board (ESRB) has issued a Recommendation that financial regulators across the EU take action to restrict the ability of certain financial institutions to make distributions, including the ability to create obligations to pay variable remuneration to material risk takers.
The ESRB is an EU body responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. One of the objectives of this Recommendation is to ensure that impacted firm’s retain sufficient capital and remain resilient during the Covid-19 crisis.
The UK’s Bank of England and Prudential Regulation Authority (PRA) have issued a response to the Recommendation, noting that the Recommendation applies to UK financial institutions during the Brexit transition period but stating that the Bank of England and PRA do not consider it necessary, at this time, to extend the existing Covid-19 guidance that they have published, as we reported on here.
Key points from the Recommendation
- It is recommended that, at least until 1 January 2021, relevant regulatory authorities across the EU request that financial institutions under their supervisory remit, including credit institutions, investment firms and insurance undertakings (but excluding branches of financial institutions), refrain from undertaking any of the following actions:
- make a dividend distribution or give an irrevocable commitment to make a dividend distribution;
- buy-back ordinary shares;
- create an obligation to pay variable remuneration to a material risk taker,
which has the effect of reducing the quantity or quality of own funds at the EU group level (or at the individual level where the financial institution is not part of an EU group), and, where appropriate, at
the sub-consolidated or individual level.
- A relevant regulatory authority may exempt a financial institution from these restrictions where the financial institution is legally obliged to make that distribution.
- The relevant regulatory authorities subject to the Recommendation must report the actions that they have undertaken in response to the Recommendation, or substantiate any inaction, by completing and returning an Annex to the Recommendation by 31 July 2020.
The Recommendation builds upon, and aligns with, existing pressure from national and international financial services regulators on ‘voluntary’ pay-outs and distributions, particularly on dividends, bonuses and share buybacks. As discussed here, the European Central Bank, the European Banking Authority and the PRA were all quick to challenge such distributions and we saw a number of firms cancel planned dividend payments and reassess their approach to variable remuneration.
It is notable that the Recommendation is directed at national regulators across the EU. Although the Bank of England and PRA have quickly responded to assert that they consider the steps taken to-date to be sufficient, it is yet to be seen how each regulator will respond. If your firm is caught within the scope of the Recommendation, you should take steps to understand if your EU financial services regulator(s) will take action in response to the Recommendation and identify what this will mean for your firm, including for the firm's variable remuneration arrangements.
If we can support you with your remuneration arrangements, please do let us know.