14 April 2020
The EU Insurance and Occupational Pensions Authority (EIOPA) has published an opinion which seeks to enhance supervisory convergence on the supervision of the remuneration principles in the insurance and reinsurance sector, as set out under the Solvency II Delegated Regulation ((EU) 2015/35). The opinion follows a 2019 consultation and the feedback statement from that consultation has also been published.
Application
- The opinion is addressed to national supervisory authorities, that is, national regulators. EIOPA will begin monitoring the application of the opinion by regulators from early 2022.
- The opinion focusses on a reduced scope of staff, identified as potential higher profile risk-takers, who fall within defined categories (as set out at 3.1 of the opinion, including material risk takers and executive directors), and whose annual variable remuneration exceeds EUR50,000 and represents more than 1/3 of total annual remuneration.
- Regulators may apply the opinion to staff not covered by the opinion but may instead adopt a proportionate and more flexible risk-based approach for those staff members.
- Regulators may also adopt a proportionate and more flexible approach when supervising remuneration in ‘low risk’ firms, including the design of remuneration policy.
- When supervising global systemically important firms, regulators should also take into account the FSB Principles and Standards for Sound Compensation Practices.
Key points
The guidance relates directly to the principles set out in Solvency II Delegated Regulation ((EU) 2015/35):
- Balance of fixed and variable components of remuneration. Where a variable to fixed remuneration ratio exceeds 1:1, regulators should engage with the firm to investigate whether the remuneration policy is balanced with regard to the proportion of variable remuneration. Regulators should pay specific attention to very low fixed remuneration.
- Deferral of a substantial portion of variable remuneration. 40% of variable remuneration is considered to be ‘substantial’ and regulators should engage with firms where deferral is lower than 40%. A larger deferred portion is recommended for particularly high variable remuneration, e.g. if the variable to fixed remuneration ratio is higher than 1:1.
- Assessment of performance. Where variable remuneration is performance related, the total amount of variable remuneration has to be based on a combination of the assessment of individual, business unit and overall firm or group performance, and should be set in a multi-year framework.
- Performance criteria. Both financial (quantitative) and non-financial (qualitative) criteria should be used, with non-financial criteria particularly important for key function holders, and the firm needs to be able to describe the consequences on the pay-out of variable remuneration where criteria are not met. Financial and non-financial criteria need to be appropriately balanced, e.g. 80% financial and 20% non-financial is unlikely to be appropriately balanced. Performance criteria should be linked to decisions of the relevant staff member and ensure the remuneration award process has an appropriate impact on individual behaviour.
- Performance measurement must include downward adjustments for exposure to current and future risks. Regulators should consider downward adjustment to include malus, clawback and in-year adjustments, and should require firms to provide a clear description of any downward adjustments. Downward adjustments should not just be used where staff members do not meet personal objectives but also when business units and/or the firm as a whole fail to do so. If a firm is likely to breach, or has breached, the Solvency Capital Requirements, downward adjustments should be applied.
- Termination payments must reflect performance and not reward failure. Regulators should assess a firm’s approach to termination payments and the termination payment policy, which should contain the maximum payment or the criteria for determining the amount of the payment. The opinion clarifies which termination payments are generally taken into account as variable remuneration and those which are not generally taken into account as variable remuneration.
Tapestry comment
The Solvency II Delegated Regulation ((EU) 2015/35) sets out high-level remuneration principles for firms in the insurance and reinsurance sector. The high-level nature of these principles has led to divergent practices across the EU with different national regulators and firms applying the principles inconsistently. The opinion seeks to create supervisory convergence to ensure that there is a ‘level playing field’ where the remuneration principles are applied consistently throughout the EU.
For many firms, the added clarity will be helpful. EIOPA states in the opinion that they do not seek to add requirements or to create administrative burden. In practice, those firms that already comply with other (more stringent) remuneration rules, such as under CRD IV, the UCITS V Directive or AIFMD, will already be familiar with many of the points set out in the opinion and so should not be materially impacted. That said, all firms should read the opinion in detail to ensure that current practice aligns with the expectations set out in the opinion. Although EIOPA will only looked to monitor how regulators are applying the opinion from 2022, we anticipate that national regulators will expect firms to comply with the opinion as soon as is practicable.
If you have any questions about this update, or in relation to your remuneration regulation compliance generally, please do contact us.
Matthew Hunter
