30 October 2020
The European Banking Authority (EBA) has published a consultation paper in connection with proposed changes to its guidelines on sound remuneration policies under the Capital Requirements Directive (CRD). The consultation focusses only on changes against the existing guidelines and a track changes version has been published. The consultation runs until 29 January 2021 and the guidelines, once finalised, are expected to apply from 26 June 2021.
- Background
The EBA first published its guidelines on sound remuneration policies under the CRD in December 2015, in line with a mandate under the fourth iteration of the CRD, CRD IV. The guidelines apply to CRD firms and seek to harmonise the remuneration policies of CRD firms across Europe, in line with the CRD remuneration rules. The latest iteration of the CRD, CRD V, expands on this and includes a mandate for the EBA to issue guidelines on gender neutral remuneration policies for CRD firms.
The EBA’s proposed revisions to the guidelines are intended to reflect the amendments to the rules regulating the remuneration policies of CRD firms that were introduced by CRD V and, in particular, the requirement that those remuneration policies should be gender neutral. - Revisions
The proposed revisions to the guidelines impact the following topics:
- Gender neutral – many of the changes relate to the requirement under CRD V that remuneration policies and practices are ‘gender neutral’, meaning that there must be equal pay for male and female workers for equal work or work of equal value. These changes to the guidelines are reasonably wide-ranging. For example, the guidelines expect firms to demonstrate how each aspect of the remuneration policy is gender neutral and undertake specific additional record-keeping, and expects that all employment conditions that may impact remuneration are gender neutral (including recruitment policies, career development and succession plans, access to training and the ability to apply for internal vacancies). The guidance also expects the supervisory function / remuneration committee review of the remuneration policy to include analysis of whether the policy is gender neutral and, as part of the review, consider the overall gender pay gap and calculate specific gender pay gap ratios.
- Remuneration policy – amongst other existing factors, a firm’s remuneration policy for all staff should also be consistent with the firm’s ‘risk culture’, including with regard to environmental, social and governance (ESG) risk factors.
- Material risk taker identification – updates have been made to reflect the CRD V changes to the process of identifying material risk takers and also the new regulatory technical standards on identifying material risk takers.
- Group consolidation – revisions have been made to the guidelines to clarify how CRD firms should apply the remuneration rules on a consolidated basis for their non-CRD subsidiaries, including investment firms and others financial institutions that are subject to a specific remuneration framework (such as UCITS, AIFMD and MiFID firms).
- Proportionality – the new CRD V rules will materially impact the concept of proportionality. Proportionality will now comprise of specific firm-level and individual-level proportionality thresholds, under which certain remuneration rules can be waived. This is as opposed to the existing, more discretionary, concept of proportionality. The EBA has provided procedural requirements and expectations for the application of these new thresholds and waivers, including the method of calculating the firm’s average assets when applying firm-level proportionality and calculating individual remuneration when applying individual-level proportionality.
- Retention bonuses – the guidance on retention bonuses has been heavily revised, including to ensure that retention bonuses are only awarded where properly justified and to clarify that retention bonuses must be taken into account when calculating the ‘bonus cap’. The EBA notes that this has been revised based on supervisory experience regarding cases of circumvention.
- Severance payments – the guidance on severance payments has been revised, including to clarify which payments can properly be regarded as severance payments and those which cannot, and also when severance payments can be excluded from the scope of certain remuneration rules. As with retention bonuses, the EBA notes that this has been revised based on supervisory experience regarding cases of circumvention.
- Disclosure – the existing guidelines provide guidance on the remuneration disclosure requirements that apply under the Capital Requirements Regulation. This guidance has now been removed as it has become superseded by the draft implementing technical standards on disclosure, including remuneration disclosure, published by the EBA in June.
- Clawback – the EBA has removed the recommendation that clawback should, in particular, be applied when a “staff member contributed significantly to the subdued or negative financial performance” of the firm. The EBA has, however, added an expectation that where the application of malus is not possible in connection with an award due to the deferral requirement being disapplied using proportionality, firms should ensure that clawback can be applied.
- Timing
- The EBA is holding a public hearing on the draft guidelines on 13 January 2021.
- The deadline for consultation responses is 29 January 2021. A consultation response can be submitted on the webpage that can be found here.
- The EBA expects to publish the final guidelines in the first half of 2021 and the guidelines are then expected to apply from 26 June 2021, at which point the revised guidelines will replace the 2015 guidelines.
Tapestry comment
The track changes version of the guidelines contains extensive mark-up throughout. That said, there does not appear to be many major surprises in here. As the EBA notes, the majority of the changes reflect the CRD V changes and, in particular, the new ‘gender neutral’ requirement, and so should align with what CRD firms were expecting. The changes relating to remuneration policy, retention bonuses, severance payments and clawback are the notable exceptions.
Although many firms will already consider their remuneration policies and practices to be ‘gender neutral’, the more granular expectations set out under the guidelines, for example, relating to record-keeping and supervisory function / remuneration committee oversight, as well as a focus on wider policies (such as recruitment policies and succession plans), will give firms an opportunity, and a regulatory driver, to ensure that this is truly the case. These new expectations will, however, need to be administered and firms should work through the practicalities of doing so.
Except where noted above, or where minor changes have been made to reflect CRD V (e.g. changing references from 3 to 5 year deferral periods to the 4 or 5 years required under CRD V; referring to listed firms being able to offer share-linked instruments), much of the existing guidance remains unaffected, particularly with regard to structural elements of remuneration, such as in relation to the award, pay-out and risk adjustment processes. This is generally positive news.
Firms should take the time to review the proposed revisions to the guidelines in detail, understand exactly how the changes will impact existing practice and, where appropriate, respond to the consultation process. Firms should note that the EBA has clearly stated that comments are only invited on the proposed amendments and not the existing text of the guidelines so, unfortunately, this is not a chance to try and delete any existing guidelines that you do not like!
If you would like to discuss these changes, or anything else, please do contact us.
Matthew Hunter