19 June 2020
The European Banking Authority (EBA) has published its final draft Regulatory Technical Standards (RTS) on the criteria to identify those members of staff that have a material impact on the risk profile of a firm regulated under the revised Capital Requirements Directive (CRD). The draft RTS has now been submitted for adoption by the European Commission.
- The RTS are intended to define and harmonise the criteria for the identification of material risk takers under the revised CRD across the EU, and establish a range of qualitative and quantitative criteria that firms must consider during the identification process, alongside the identification criteria set out in the revised CRD and any additional internal criteria established by a CRD firm.
- The RTS will supersede the previous Commission Delegated Regulation (EU) No 604/2014 which established the qualitative and quantitative criteria used to identify material risk takers in CRD firms. The qualitative criteria from the previous regulation have been largely retained in the RTS with a few amendments.
- The draft RTS underwent a consultation process at the end of last year and a number of changes have been made in response to the feedback received.
- In particular, numerous changes have been made to increase the clarity of the RTS in response to the feedback received. For example, the definition of ‘managerial responsibility’, which was perceived to have initially been drafted too wide, has been revised to take into account the fact that institutions of different sizes have different layers of hierarchical levels. The EBA also clarified how the identification criteria should be applied on a consolidated, sub-consolidated and individual basis, clarifying that the quantitative criteria set out in the draft RTS should be applied to institutions only on an individual level, so that subsidiaries that are subject to specific remuneration requirements can follow those.
- A few changes have also been made in response to the feedback received to ensure that the RTS are proportionate. For example, the quantitative identification criterion that applies to the 0.3% of staff with the highest remuneration has been amended to only apply to institutions that have more than 1,000 staff members in order to reduce the burden for small institutions.
- The next step is for the European Commission to adopt the RTS. It is unclear when the new RTS will start to apply and, in the consultation feedback, the EBA noted that the final date of application depends on the timing of the adoption procedure but recognises that there is a general desire for the new RTS to apply, at the earliest, to the performance year 2021 for the identification of 2021 identified staff onwards.
It is positive to see that the EBA has accommodated a number of the points raised during the feedback process, with the final draft RTS applying a more proportionate approach and dealing with a number of points that previously lacked clarity. Although the EBA did not accommodate all of the feedback raised during the consultation process, the generally positive response demonstrates the importance of impacted firms reviewing and responding to these consultation processes to mitigate the risk of practical issues arising in the future.
As reported here, the EBA has started a similar consultation process on the identification of material risk takers for investment firms that will be regulated under the new Investment Firms Directive, as well as a consultation process on variable remuneration instruments. If you would like to discuss these with us, please do let us know.
The application date for the draft RTS is currently unknown but it is likely that the identification criteria will apply from the performance year 2021 onwards. CRD firms should review the RTS in detail and model the impact that this may have on the material risk taker population and identify those staff members who were not previously caught by the scope of the more onerous remuneration requirements but who will now be caught. Firms should also consider how the RTS will impact the drafting of the identification criteria set out within the firm's remuneration policy, given the requirement to set out objective criteria to determine whether the professional activities of staff or categories of staff have a significant impact on a material business unit’s risk profile.
If we can support you with your remuneration arrangements, please do let us know.