On July 28, 2016, the European Commission (the "Commission") issued a report on the remuneration rules under Directive 2013/36/EU (Capital Requirements Directive IV, "CRD IV") and Regulation (EU) No575/2013 (Capital Requirements Regulation, "CRR") which are applicable to credit institutions and investment firms.

With this report the Commission expresses its views in favour of certain legislative amendments of the remuneration rules under CRD IV. Prior to moving forward such proposals the Commission expects to initiate an impact assessment regarding the potential effects of the proposed changes.

I. Summary

The Commission's report addresses among other matters:

  • The principle of proportionality should not lead to the disapplication of remuneration rules. Instead express exemptions should be introduced for small and non-complex institutions and staff receiving non-material amounts of variable remuneration.
  • No change in bonus caps.
  • Variable remuneration may be made in the form of share-linked instruments (instead of only shares) by listed institutions.
  • Improvement for AIFMs which are part of a CRD group.

We have summarized below in more detail the most important proposed changes.

1. The Principle of "Proportionality"

The Status Quo

The CRD remuneration rules currently do not provide for an explicit exemption for smaller credit institutions or investment firms; however, the principle of proportionality applies to CRD IV as well.

In their national implementations of the CRD, many Member States have – based on the concept of proportionality – put in place thresholds or other criteria under which certain remuneration rules do not need to be applied. In a paper published by the European Banking Authority ("EBA") in December 2015 addressed to the EU institutions, EBA indicated that the principle of proportionality could not lead to the disapplication of rules and suggested that amendments of the rules were necessary to provide for specific exemptions in order to ensure a harmonised application of the rules.

The Commission's View

The Commission seems to agree that, in the case of small and non-complex institutions and staff with non-material amounts of variable remuneration, the application of the rules on deferral and pay-out in instruments is not proportionate. However, rather than permitting Member States to disapply certain rules based upon the principle of proportionality, the Commission is considering proposing amendments to the CRD remuneration rules pursuant to which (only) the deferral and pay-out in instruments requirements would be eligible for disapplication and only in certain defined cases of smaller and non-complex institutions. Hence, the itself positive introduction of such exemptions would be accompanied by a loss of flexibility in practice.

Impact of AIFMD remuneration rules

Hopefully the Commission's position will have no impact on the view taken by ESMA several months ago with respect to the remuneration rules under the AIFMD: In that opinion, ESMA took the positon that certain variable remuneration principles may be disapplied based upon the principle of proportionality and so far the Commission has not shown any indication that it disagrees with this view in the context of the AIFMD.

2. Application at Group Level

The Commission explicitly confirms that managers of UCITS and AIFs that are part of a CRD-regulated group are not subject to the CRD remuneration rules, provided that the staff of such managers have no material impact on the risk profile of the CRD group to which they belong.

3. Use of Share-Linked Instruments

Currently, the CRD pay-out in instruments requirement allows listed institutions to use only shares for the purpose of paying out variable remuneration, notwithstanding the impediments that exist in practice to the repeated use of shares. In the Commission's view, share-linked instruments are as effective as shares in achieving alignment of interest between staff members, shareholders and the long-term interest of the institution if such share-linked instruments closely track the value of the shares without a leverage effect. Therefore, the Commission announced that it will consider proposing a legislative amendment to permit share-linked instruments as an additional variable remuneration instrument.

4. Classification of Fixed and Variable Remuneration

The Commission also reports that in the past some institutions have incorrectly classified "role-based allowances" as fixed remuneration. Role-based allowances are payments based on the role, function or organizational responsibility of a staff member. Following an opinion issued by the EBA, all Member States have meanwhile taken measures to ensure the correct allocation of these allowances.

The bonus cap requirements (i.e. the maximum ratio between fixed and variable remuneration) remains in place.

II. Next Steps

The Commission has announced that it will conduct an impact assessment relating to the points outlined above. This assessment will then be taken into account in the context of the wider revision of the CRD IV and CRR. Timing is still uncertain at this point.

Given the limitations on flexibility that the amendments regarding proportionality may create in practice, these developments should be monitored closely.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.