Jan 2020: FS: European Banking Authority Identification of Material Risk Takers

The European Banking Authority (EBA) has recently published its Peer Review Report on how competent authorities (NCAs) in each EU member state have applied the regulatory technical standards (RTS) on identifying material risk takers (MRTs) – those individuals that have a material impact on the risk profile of the firm. The report generally highlights a good level of application by NCAs, with no ‘deficiencies or major issues’ during the period in question (1 January 2015 to 31 December 2017). However, it does identify a number of best practices and highlights some weaknesses of the NCAs.

Background

Under the Capital Requirements Directive (CRD), regulated firms must comply with, and report on, specific requirements relating to MRT remuneration. In order to do this, firms must identify their MRTs. The RTS were introduced in 2014 in order to harmonise EU firms’ approach to identifying MRTs, providing a list of quantitative and qualitative criteria to assist in this identification.

This peer review aims to assess the supervisory practices followed and measures taken by NCAs in respect to the requirements of the RTS.

Key points

Best practices identified in the EBA report include:

  • collecting data on high earners identified as risk takers (i.e. whether any high earners are not regarded as identified staff) and supervisory follow through;
  • comparisons of the identification outcomes between peers;
  • provisions from NCAs on the content of internal documents regarding the identification process;
  • institutions’ notification and prior approval process regarding exemptions for identified staff;
  • assessing the application of exemptions for individual staff; and
  • the use of supervisory tools for assessing institutions’ compliance, including deeper dives and onsite reviews where needed.

Weaknesses identified in the EBA report include:

  • some NCAs have failed to distinguish between their standard risk-based methods of supervision and the application of the proportionality principle. This has led to a divergence in approach to proportionality and even the exclusion of certain institutions from supervisory review; and
  • consideration of expanding data collection on high earners. At the moment, this is usually only collected following a direct dialogue with reporting firms.

Tapestry Comment
Regulated firms could expect to see greater scrutiny as NCAs look to make improvements in line with this EBA report.

Following this peer review, the EBA is entitled to submit an opinion to the European Commission if the peer review or any other information acquired in carrying it out shows that a legislative initiative is necessary to ensure further harmonisation of prudential rules. We do not expect the EBA to send that opinion as we already know that the EBA is busy in the area of MRTs. As reported in our earlier newsletter, the EBA has already published the updated draft RTS to identify MRTs under CRD V and there is a consultation paper out on that at the moment. It will be interesting to see whether the findings in the EBA’s peer review will bring any changes to the draft to address the weaknesses identified.
 
Firms should review their current approach to identifying MRTs and documenting this decision making so that they can react to any changes presented by the NCAs in light of this review or the updated draft RTS, which is out for consultation until mid-February.


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