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Remuneration Rules in Financial Services

A package of EU measures published in November 2016 that aim to reduce risk taking in the banking system and which includes remuneration rules that would apply to all but the smallest financial firms were agreed to on 15 Feb 2019 and await final approval by the European Parliament and the Council of Ministers. The remuneration rules feature in a proposed revision of the capital requirements directive (CRDIV). The revised directive would be called CRDV and most the provisions would be expected to take effect on 1 Jan 2021 -- until that time CRDIV and current EBA guidelines remain in force.

Published in November 2016, the aim of revising CRDIV is to promote “the sound and effective risk management of institutions by aligning the long-term interests of both institutions and their staff qualifying as material risk takers.” The agreed provisions of CRDV include:

• A list of functions and staff that must be considered as “material risk takers.”

• The deferral period for remuneration payable under deferral arrangements will not be less than four to five years, up from three to five under CRDIV. The deferral period for members of management boards and senior managers will be five years.

• Remuneration policies must be gender neutral and based on equal pay for women and men for equal work or work of equal value. The European Banking Authority (EBA) – the EU’s regulatory authority – will publish guidelines prior to the directive’s 2021 implementation date and will submit a report about their application within two years of their publication.

• Continuation of the proportionality principle that aims to reduce the burden of applying certain remuneration rules for some institutions. The EBA will publish guidelines on the principle. The principle is applicable to:

  • Smaller and less complex banking institutions (those with assets valued on average and on an individual basis equal to or less than €5 billion over the four-year period immediately preceding the current financial year), or to staff whose annual variable remuneration doesn’t exceed €50,000 and one-third of the staff member’s annual total remuneration.

  • Member states may lower or increase the €5 billion threshold but the threshold cannot exceed €15 billion.

• The maximum ratio between fixed and variable remuneration – the so-called bonus cap – will continue to apply to all risk-takers in all institutions. CRDIV caps bonus payments at 100% of an individual's basic salary, but the cap could be raised to 200% of basic salary but only with shareholder approval.

• Listed and non-listed institutions will be able to include share-linked instruments in remuneration.

• Sector-specific remuneration rules will apply to certain sectoral organizations even they are part of a group structure that is subject to CRDV. However, certain employees in these sectoral organizations could be in scope of the remuneration provisions of CRDV (for example, if they are classified as “material risk takers” under the group structure).

Written by Sophie Black (Partner) and Richard Symons (Associate).

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