Malta: Changing Remuneration Structures Under CRD IV

Last Updated: 3 February 2014
Article by Juanita Bencini
Most Read Contributor in Malta, August 2017

Introduction

The recent financial crisis discovered problems in banks' risk management practices and regulatory frameworks which ultimately led to a breakdown of the financial system. Excessive remuneration was blamed as one of the causes of the financial crisis as Board Directors received lavish remuneration packages which encouraged excessive risk-taking.

As part of the CRD IV packaged issued on 16 April 2013, the EU sought to regulate remuneration practices to be in line with banks' performance and to discourage excessive risk-taking behaviours. In particular, CRD IV aimed to regulate the relationship between pay and performance to ensure that remuneration reflects the circumstances of the bank.

In order to promote even more clarity surrounding the remuneration package, CRD IV requires credit institutions to have a section on their website explaining how they comply with the remuneration requirements discussed below.

The CRD IV remuneration requirements became applicable from 1 January 2014.

Remuneration policy

Credit institutions should have robust governance arrangements, which include a remuneration policy and practices that are consistent with and promote sound and effective risk management. The policy and practices must be comprehensive and proportionate to the nature, scale and complexity of the institutions' business model and activities.

The Board of Directors is responsible for approving and overseeing the implementation of the remuneration policy. CRD IV requires the implementation of the remuneration policy to be subject to a central and independent internal review at least on an annual basis. Furthermore, the Board of Directors is also responsible to ensure that the principles of the remuneration policy are reviewed periodically. At present, the requirement for a remuneration policy is mandated by Banking Rule 12 ("BR/12"), which also provides for this policy to be reviewed at least on an annual basis.

Remuneration committee

Credit institutions that are significant in terms of their size, internal organisation, nature, scope and complexity of their activities are required to establish a remuneration committee composed of non-executive directors. This is in line with BR/12 current requirements.

Disclosure requirements

Credit institutions are required to provide the MFSA the following information on a yearly basis:

  • Aggregate quantitative information on remuneration, broken down by business area;
  • Aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the institution ("identified staff"); and
  • The number of individuals being remunerated €1m or more per financial year ("high earners"). Such information is submitted to the European Banking Authority ("EBA") by the MFSA. The latest report issued by the EBA indicated there were no high earners in Malta during 2012.

Variable remuneration

The current requirements under BR/12 allow credit institutions to set their own ratio of variable to fixed remuneration subject to this being appropriately balanced. CRD IV introduces a bonus cap on variable remuneration affecting identified staff. The following cap will apply as from 1 January 2015 with respect to 2014 performance:

Minimum cap

  • 100% of the fixed component of remuneration, meaning a ratio between fixed to variable remuneration of 1:1;
  • Member States are given the liberty to set a lower cap.

Higher cap

  • Credit institutions may be allowed to apply higher caps provided that the variable remuneration does not exceed 200% of the fixed remuneration (Member States also allowed to set a lower maximum percentage);
  • A discount rate, which is still unknown, can be applied to variable remuneration that is paid in instruments that are deferred for a period of not less than 5 years, as long as this does not exceed 25% of total variable remuneration;
  • In order to apply the higher bonus cap, credit institutions must obtain approval from 66% of the shareholders holding at least 50% of the share capital or voting rights of the institution;
  • If the 50% quorum is not reached, the higher bonus cap must be approved by a 75% majority;
  • In order to obtain such an approval, credit institutions must provide the shareholders with information on the number of staff affected, their functions and the expected impact on capital.

The variable remuneration shall be subject to malus or clawback up to the full amount where the individual concerned participated or was responsible for conduct which resulted in significant losses to the institution or where the individual failed to meet fitness and proprietary tests.

Components of variable remuneration

CRD IV requires that at least 50% of the variable remuneration must be made up of the following:

  • Shares or equivalent ownership instruments;
  • Other Tier 1 and Tier 2 instruments as specified under Articles 52 and 63 of the Capital Requirements Regulation ("CRR") respectively.

In addition to the above, CRD IV requires that at least 40% of the variable remuneration component is deferred over a period which is not less than 3 – 5 years. At least 60% must be deferred if variable pay is a particularly high amount.

Outstanding guidelines

  • The EBA is currently still developing guidelines on the following matters, which may thus affect the remuneration policies of credit institutions:
  • Technical Standards for the definition of material risk takers (date TBD);
  • Technical Standards on classes of instruments that are appropriate to be used for the purposes of variable remuneration. These are expected to be endorsed by the European Commission by 31 March 2014; and
  • Guidelines on the applicable notional discount rate for variable remuneration, setting out the calculation of the discount rate for variable remuneration and clarifying how it should be applied. The EBA is expecting to publish the final Guidelines by 31 March 2014.

How KPMG can help

With a dedicated team of subject matter experts, KPMG has the right skills and competencies to help you successfully manage the transition to CRD IV. KPMG offers a suite of services, including (but not limited to):

  • Assistance with understanding the changes being introduced by the regime and their implications on your organisation;
  • Provision of tailored training to your staff, senior management and Board of Directors;
  • Conducting a gap analysis to understand the gaps in meeting the remuneration requirements;
  • Advising on any changes that may need to be effected to your internal governance model in order to allow for a the full implementation of CRD IV; and
  • Assistance in drafting and/or updating documentation, including your bank's remuneration policy.

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.

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Authors
Juanita Bencini
 
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