9 July 2021
The European Banking Authority (EBA) has published their final report on the revised guidelines on sound remuneration policies under the Capital Requirements Directive (CRD), as recently amended. The publication follows a consultation process that ended on 29 January 2021. The consultation responses are summarised at the end of the final report document. The revised guidelines will take effect and replace the existing guidelines from 31 December 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 guidelines have now been updated to accommodate the changes to the CRD that were introduced by the latest iteration of the CRD, CRD V.
Key revisions
The key 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 are wide-ranging. For example, the guidelines expect firms to be able to demonstrate that the remuneration policy is gender neutral and undertake specific additional record-keeping. 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 to monitor the development of the gender pay gap on a country-by-country basis separately for different categories of staff (in particular, see paras. 14, 23 – 27, 57(b), 63 – 65, 185(j), 198, 308 and 311(c)).
- Remuneration policy – alongside other existing requirements, a firm’s remuneration policy for all staff should also be consistent with the firm’s ‘risk strategy’, including with regard to environmental, social and governance (ESG) risk-related objectives, and ‘risk culture’ (in particular, see para. 16).
- Remuneration committee composition – the expectations as to the independence of the chair and majority of members of the remuneration committee have been amended, with the expectation for an independent chair and majority of members now only explicitly stated to apply to globally systemically important institutions and other systemically important institutions. For other significant firms, a sufficient number of members should be independent, as determined by competent authorities or national law (in particular, see para. 55).
- Material risk taker identification – extensive 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. Amongst other things, the updates reflect the removal of the requirement to notify regulators of material risk taker exclusions where regulatory approval is not being sought (in particular, see paras. 98 – 122, 314 and 315).
- Group consolidation – revisions have been made to the guidelines to clarify how CRD firms should apply the remuneration rules on a consolidated basis, including in relation to their non-CRD subsidiaries, such as investment firms and others financial institutions that are subject to a specific remuneration framework (such as UCITS and AIFMD firms) (in particular, see paras. 8 – 10, 75 – 84, 313 and 414).
- Proportionality – in connection with the material amendments to the concept of proportionality that were made under CRD V, the EBA has provided procedural expectations for the application of the new proportionality thresholds and waivers, including the method of calculating the firm’s assets when applying firm-level proportionality and calculating individual remuneration when applying individual-level proportionality (in particular, see paras. 85 – 97).
- Retention bonuses – the guidance on retention bonuses has been heavily revised and expanded. The revised guidance seeks to ensure that retention bonuses are only awarded where the firm can clearly demonstrate that the retention bonuses are justified and clarifies, amongst other points, that retention bonuses must comply with the relevant requirements on variable remuneration, including the ‘bonus cap’, with guidance specifying how the retention bonus should be included in the calculation of the ‘bonus cap’. The EBA noted in their consultation that these revisions are based on supervisory experience regarding cases of circumvention (in particular, see paras. 143 – 150).
- 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 should not, and to also clarify when severance payments can be excluded from the scope of the deferral, payment in instruments and ‘bonus cap’ remuneration rules. As with retention bonuses, the EBA noted in their consultation that these revisions are based on supervisory experience regarding cases of circumvention (in particular, see paras. 151 and 162 – 176).
- Disclosure – the guidance on the remuneration disclosure requirements that apply under the Capital Requirements Regulation has been removed as it has been superseded by the new implementing technical standards on disclosure, including remuneration disclosure (in particular, see the fact that there is no disclosure guidance anymore!).
- Clawback – the EBA has removed the statement that clawback should, in particular, be applied “when the identified 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 (in particular, see paras. 294 and 296).
Timing
The revised guidelines will take effect and replace the existing guidelines from 31 December 2021.
The guidelines are addressed to both competent authorities and firms directly.
Competent authorities will be required to notify the EBA as to whether or not they comply or intend to comply with the guidelines and incorporate them into their practices or, if not, the reasons for non-compliance. The date by which this notification needs to be made has not yet been stated.
Tapestry comment
The guidelines have been amended extensively. The majority of the changes reflect the amendments to the remuneration rules under CRD V, with a notable focus on the new requirement for remuneration policies and practices to be ‘gender neutral’. The changes relating to, in particular, retention bonuses, severance payments and clawback do not derive from CRD V and instead reflect a change in the EBA’s focus and expectations in relation to existing requirements.
Many firms will already consider their remuneration policies and practices to be ‘gender neutral’ but, although the EBA has taken steps to clarify their new expectations following the consultation process, the guidance sets out a number of more granular expectations, such as those relating to record-keeping and supervisory function / remuneration committee oversight. These new expectations will need to be administered and policies and processes may need to be amended to implement the expectations. Firms should work through the practicalities of doing so.
Except as noted under the ‘key revisions’ section of our alert 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 substance 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 but firms should take this opportunity to remind themselves of the EBA’s existing expectations, as well as ensuring that the firm is familiar with the new expectations on topics such as retention and severance payments. Impacted firms should take the time to review the revised guidelines in detail, understand exactly how the changes will impact existing practice and, where appropriate, make changes to comply.
For UK regulated firms, it is important to remember that the UK’s Prudential Regulation Authority and Financial Conduct Authority are not required to incorporate the revised EBA guidance into their regulatory expectations. The UK regulators may decide to do this and, if so, should engage with firms on that basis ahead of any changes to their expectations. Staff members of UK firms may, however, become subject to the revised guidance where they fall within the scope of consolidation of an impacted firm, depending on the specific facts. This should be considered in detail.
Please note that the revised guidelines will need to be considered alongside two other sets of revised EBA guidelines that the EBA has also published: (a) the revised joint ESMA and EBA guidelines on the assessment of the suitability of members of the management body and key function holders under CRD and the MiFID II Directive; and (b) the revised guidelines on internal governance under CRD. Both sets of revised guidelines reflect the changes implemented by CRD V and the new Investment Firms Directive. The former specifies, amongst other points, that a gender-balanced composition of the management body is of particular importance. The latter sets out, amongst other points, expectations for remuneration committees and further expectations as to how firms should ensure that their policies, including remuneration, recruitment and succession policies and plans, are gender neutral.
If you would like to discuss these changes, or anything else, please do contact us.
Matthew Hunter