Dec 2019 – FS – EBA CRD Material Risk Taker Identification Published

As reported last week, the European Banking Authority (EBA) has published a consultation paper in relation to draft regulatory technical standards (RTS) on the criteria to identify all categories of staff whose professional activities have a material impact on the institutions’ risk profile (MRTs) under the Capital Requirements Directive (CRD). Consultation submissions are required by 19 February 2020 and can be submitted here by clicking on the ‘Consultation Papers’ tab near the bottom of the screen and then clicking on the ‘Send your comments’ button at the bottom.
 
Background

Firms regulated under the CRD must comply with specific requirements regarding remuneration policies and variable remuneration for MRTs, in addition to the general requirements regarding appropriate remuneration policies. To do this, firms must identify their MRTs.

To assist firms with the identification of MRTs and to harmonise the identification process between firms and across the EU, RTS were published in 2014 that set out a list of quantitative and qualitative criteria to help to identify the ‘core’ MRTs. Where a staff member met any of the qualitative criteria, they would be regarded as a MRT. Where a staff member met any of the quantitative criteria, they would be presumed to be a MRT, unless it could be determined otherwise.

The EU recently published the text of the latest CRD (CRD V), as reported here. The CRD V amends the categories of staff who should be considered to be MRTs and contains a mandate for the EBA to draft further RTS to help to identify MRTs and further harmonise the identification process across the EU. The EBA has now published the draft RTS and has begun the consultation process.

Key points

Definitions

  • The categories of staff listed in CRD V as categories that should be regarded as MRTs include reference to: “with managerial responsibility”, “control functions”, “material business unit” and “significant impact on the relevant business unit’s risk profile”. The draft RTS set out the criteria to be used to define these terms. These definitions, particularly the new definition of material business unit, may materially impact which staff members are regarded as MRTs.

Qualitative criteria

  • The qualitative criteria in the draft RTS are comparable to those in the 2014 RTS. The presentation of the criteria has, however, changed materially.
  • A number of the original qualitative criteria have moved from the RTS solely to the body of CRD V (e.g. references to members of the management body; senior management; staff members with managerial responsibility over the institution’s control functions or material business units).
  • The qualitative criteria that remain from the 2014 RTS have mostly been streamlined and/or clarified (e.g. references to members of committees have been clarified to refer only to voting members; reference to the staff member who heads the finance function has been replaced with a more specific reference to a staff member with managerial responsibilities for “the adequacy and appropriateness of accounting procedures”. The clarifications and the streamlined approach may materially impact how firms approach identification of MRTs using the qualitative criteria.
  • The general ‘catch-all’ qualitative criterion that applied under the RTS 2014 to any staff member with managerial responsibility for any other staff member who met one of the other qualitative criteria appears to have been removed.

Quantitative criteria

  • The quantitative criteria are also comparable to the 2014 RTS with a few differences. These differences are set out in the following paragraphs.
  • The quantitative criterion that applied under the 2014 RTS where a participant had been awarded, in the preceding financial year, total remuneration of EUR 500,000 or more has been increased to EUR 750,000 or more.
  • The quantitative criterion that applied under the 2014 RTS where the staff member is within the 0.3% of staff who have been awarded the highest total remuneration in the preceding financial year is materially the same under the draft RTS but the wording has been clarified to refer to this assessment needing to be based on the institution on an individual basis.
  • The quantitative criterion that applied under the 2014 RTS where the staff member was awarded total remuneration equal to or greater than the lowest total remuneration award in the preceding financial year to a member of the senior management or to a member of staff who meets certain of the qualitative criteria appears to have been removed.
  • The ability under the 2014 RTS to determine that an individual identified as an MRT solely under the quantitative criteria will not be an MRT where the staff member (or category of staff): (a) only carries out professional activities and has authorities in a business unit that is not a material business unit; or (b) their professional activities have no significant impact on the risk profile of a material business unit, has been preserved. There are some clarifications regarding the operation of this ability, e.g. the reference to ‘significant impact’ in the preceding sentence referred to ‘material impact’ in the 2014 RTS and some of the criteria that should be considered when determining whether the staff member has a significant impact on the risk profile of a material business unit are set out in the draft RTS.
  • The obligation to seek the prior approval of the competent regulatory authority to apply the ability referred to in the paragraph above now applies to all applications of this ability. The requirement for the competent regulatory authority to inform the EBA before giving approval for the application of this ability to a staff member awarded total remuneration of EUR 1,000,000 or more in the preceding financial year continues to apply, as does the requirement that approval for staff members awarded EUR 1,000,000 or more in the preceding financial year is only given in exceptional circumstances. The draft RTS clarify that exceptional circumstances “entails a situation that is unusual and very infrequent or far beyond what is usual”.

Timing

Consultation submissions are required by 19 February 2020.

The EBA expects to submit a final draft of the RTS to the European Commission in June 2020.

Tapestry comment 
On the face of it, the draft RTS is not ground-breaking. The quantitative and qualitative criteria are comparable with the 2014 RTS and we had already expected the added clarity with regard to the definitions of, e.g. “material business unit” and “managerial responsibility” following the explicit references to these in the mandate prescribed in CRD V. That said, firms should review the draft RTS in detail as soon as practicable to determine the impact, if any, that the draft RTS would have on the identification process if it came into effect in its current form.

The overarching objective of both the 2014 RTS and the draft RTS is to harmonise the criteria for the identification of MRTs to ensure a consistent approach to the identification of such staff across the EU. The draft RTS undoubtedly takes steps to achieve this, clarifying previously ambiguous or imprecise criteria that required a degree of interpretation to navigate. The question for firms, however, is whether the added clarity is more restrictive or burdensome than it is helpful.

It may be useful for firms to take the time to model the draft RTS criteria against the staff population, or a sample of the staff population, to identify the differences between identification under the current approach and identification under the draft RTS. Firms will then be able to identify whether the new criteria captures any ‘anomalies’, that is, any staff members who the firm thinks should not be caught but are, and also importantly, any staff members who the firm thinks should be caught but are not. It must be remembered, when conducting the modelling process, that the RTS criteria identify the minimum categories of staff who should be regarded as MRTs and are not exhaustive – firms are expected to apply their own additional criteria, where required.

The findings of any modelling process, as suggested above, can then be used to respond to the consultation process, either on an individual firm basis or via an industry organisation. As the identification criteria are unlikely to change for a long time following the publication of the final RTS, we recommend that firms take the time now to work through the draft and respond to the consultation process before it ends on 19 February 2019.


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