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Update on Remuneration for CRD Investment Firms
14th April 2016
EBA’s Guidelines to Sound Remuneration Policies
In December last year, the European Banking Authority (EBA) published its final guidelines on ‘Sound Remuneration Policies’. Whilst originally intended to apply for the 2016 performance year, the FCA confirmed that the implementation date is now 1st January 2017 and thus the rules will first apply to the 2017 performance year.
The EBA’s finalised guidelines sought to provide further clarification with regards to the information to be disclosed by firms with regards to remuneration. In addition, the EBA also published its opinion on proportionality suggesting a legislative change to explicitly allow for small and non-complex firms – as well as for those staff who only receive low bonuses - to waive the application of the deferral requirement and the requirement to payout parts of the variable remuneration in non-cash instruments.
UK Regulatory Response
Further to the publication of these Remuneration Guidelines, the UK Regulators – the FCA and the PRA –issued a joint statement of compliance to the EBA on the 29th February 2016 that informed they will:
“comply with all aspects of the EBA Guidelines on Sound Remuneration Policies, except for the provision that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval (the bonus cap), must be applied to all firms subject to the Capital Requirements Directive (CRD).”
UK Remuneration Requirements for CRD Investment Firms
The reason for the UK regulators have taken this stance is that they disagree with the interpretation of the Capital Requirements Directive (CRD) in the EBA’s guidelines with regard to the bonus cap.
Instead, the FCA and the PRA believe that a proportionate, risk-based approach should be taken when applying the bonus cap - the same as is applied to all other numerical requirements - which is based upon the wording of Article 92(2) of the CRD. This says:
“competent authorities shall ensure that … institutions comply with the following principles [including the bonus cap] in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities.”
As a result, the UK regulators view that application in a proportionate manner may include “not applying a remuneration principle in its entirety based on the size, internal organisation and the nature, scope and complexity of the activities of the firm in question,” thus smaller firms may continue to determine an appropriate ratio between fixed and variable remuneration for their business whilst not applying the bonus cap.
It should be noted, however, that all large and systemically important CRD-regulated firms must continue to apply the bonus cap.
If should require any assistance with regards to your Remuneration requirements including reviewing your Remuneration Policy and Remuneration Disclosure requirements, please contact our experienced compliance specialists, who would be happy to help.
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“The FCA believe that the shift to fixed remuneration makes it more difficult for firms to adjust variable remuneration to reflect their financial health, and limits deferral arrangements that put remuneration at risk should financial or conduct risks subsequently come to light.
The blanket extension of the bonus cap to all firms regulated under CRD would… exacerbate these impacts, and fails to recognise the different incentives and consequences for risk-taking across all CRD-regulated firms by disregarding the size, internal organisation, nature, scope and complexity of their activities.”
FCA, 29 February 2016
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