2 April 2020
This week, the European Banking Authority (EBA) and the UK’s Prudential Regulation Authority (PRA) have issued statements relating to the suspension of dividends and share buybacks in credit institutions, and asking those firms to assess their variable remuneration policies. The statements are intended to ensure that credit institutions maintain a sound capital base during the COVID-19 crisis and follow a similar recommendation from the European Central Bank (ECB) last week.
Key points from the EBA statement:
- The EBA urges all banks to refrain from dividend distributions or share buybacks which result in a capital distribution outside the banking section, in order to maintain its robust capitalisation. Banks should revert to their regulators if they consider themselves legally required to pay dividends or make share buybacks.
- Competent authorities should ask banks to review their remuneration policies, practices and awards to ensure they are consistent with and promote sound and effective risk management, reflecting the current economic situation.
- Remuneration and, in particular, variable remuneration, should be set at a conservative level.
- To achieve an appropriate alignment with risks stemming from COVID-19, a larger part of the variable remuneration could be deferred for a longer period and a larger proportion could be paid out in equity instruments.
- The statement follows an earlier EBA statement in which they asked that banks should follow prudent dividend and other distribution policies, including with regard to variable remuneration, to ensure that banks build up adequate capital and liquidity buffers.
- The EBA also published a separate statement asking regulators to be flexible when assessing compliance with Pillar 3 report publication deadlines, noting that if firms reasonably anticipate a delay, they should inform the regulator and market participants of the delay, the reason for the delay and, where possible, the estimated publication date.
Key points from the PRA statement:
- The PRA has written to the UK’s seven largest systemically important deposit-takers requesting that they suspend dividends and buybacks of ordinary shares until the end of 2020, and that they cancel payments of any outstanding 2019 dividends.
- The PRA expects banks not to pay any cash bonuses to senior staff, including all material risk takers.
- The PRA is confident that bank boards are already considering and will take any appropriate further actions with regard to the accrual, payment and vesting of variable remuneration over coming months.
These statements form part of wider coordinated regulatory action to ensure that banks maintain a sound capital base to enable them to continue key lending functions during this time of global crisis. The statements also show that regulators will focus on the variable remuneration policies and practices of credit institutions to ensure they remain appropriate in the current climate.
Firms should review the key aspects of their remuneration policies and practices to ensure they are appropriate in light of the ongoing crisis and should, in addition to ensuring that the structure and quantum are justifiable to the regulator, ensure that all relevant remuneration rules and guidelines continue to be complied with. If a regulator considers that excessive or otherwise inappropriate variable remuneration payments have been made, they may also take a closer look to ensure that the relevant rules and guidelines have been complied with.
The PRA’s expectation that banks do not pay any cash bonuses to senior staff, including all material risk takers, may be of particular concern to some of the impacted firms. The impacted firms will need to consider how this will be dealt with, particularly where existing contractual commitments have been made to pay those cash bonuses, and will need to consider whether an alternative instrument will be suitable, such as a larger share award.
The prohibition on dividends and buybacks may trigger other remuneration considerations. For example, although material risk takers should not receive dividend equivalents during vesting, employees who are not material risk takers may receive remuneration awards which normally attract dividend equivalents, meaning those employees will lose out on the dividends for this year. Also, if share buybacks are used to acquire treasury shares to hedge a share plan, the prohibition on share buybacks may impact the supply of treasury shares for firms that rely on buybacks for this purpose.
Firms that are not currently caught by the statements published, particularly firms in other jurisdictions, should prepare for comparable statements to be published by their appropriate regulators and consider how their firm will react. In the meantime, firms will be taking note of these developments and will consider the optics of continuing to pay out dividends and large bonuses in these uncertain times when many companies are struggling financially.
All firms should consider if there are any other changes required to remuneration policies and practices as a consequence of the COVID-19 crisis. We published an alert recently setting out a few questions that firms should consider.
If you would like to discuss this alert, or anything else, please do let us know.