Luxembourg: Remuneration Policy: Principle Of Proportionality Reconfirmed

Last Updated: 4 July 2017
Article by Jean-Pascal Nepper

Most Read Contributor in Luxembourg, September 2018

On 16 June 2017, by way of Circular N°17/658, the CSSF adopted the European Banking Authority's (EBA's) Final Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU [the CRD IV] and disclosures under Article 450 of Regulation (EU) No 575/2013. These Guidelines, replacing the so-called "2010 CEBS Guidelines on Remuneration Policies and Practices" published by the Committee of European Banking Supervisors (CEBS), the EBA's predecessor, were initially made public on 21 December 2015, but came into force 6 months ago, on 1 January 2017.

Why on earth would the CSSF come up with a Circular adopting the EBA Final Guidelines so late in the process, i.e. 18 months after their publication and 6 months after their entry into force? Well, in this particular case, the CSSF had little choice but to try to cope with the chaotic situation created 2 years ago by the EBA itself.

To properly understand the situation, we need to slightly go back in time:

Over 2015, the European banking industry closely followed the release of the EBA Final Guidelines as, in its draft version published in March 2015, the EBA surprised everyone with a new and unprecedented interpretation of the "principle of proportionality." According to this interpretation, smaller or less complex banking institutions would have no longer been able to completely disapply the rules related to bonus payment by deferral and in instruments, implying therefore that all the Identified Staff of a banking institution would have received their bonus with a deferral and a payment in equity, regardless of the size or activities of the institution or the size of the bonus. Facing the vehement reaction of the banking industry to this completely unexpected flip-flop, the EBA eventually recognised that the application of the guidelines on deferral and payment in instruments to all entities without distinction would probably have "inappropriate and counterproductive effects" and therefore proposed, to the EU Commission, to modify the Directive to definitively remove all ambiguous interpretations of the principle of proportionality.

The EBA therefore decided to postpone the application date of its Guidelines to 1 January 2017, in order to give time to EU legislative bodies to introduce the required changes. This is why, on 23 November 2016, the EU Commission published a draft amendment of the CRD IV where a modification of the principle of proportionality was put forward:

"[...] some of the rules, namely the rules on deferral and pay-out in instruments, are not workable for the smallest and least complex institutions and for staff with low variable remuneration. [...] Proportionality with regard to the smallest and least complex institutions as reflected in Article 92(2) of the CRD has been interpreted in different ways, leading to an uneven implementation of the rules in the Member States. A targeted amendment is therefore proposed to cater for the problems encountered in the application of the rules on deferral and pay-out in instruments in small and non-complex institutions and towards staff members with low variable remuneration. To this end, Article 94 is amended to clarify that the rules apply to all institutions and their identified staff, except for those that are below the thresholds set for derogations."

So, to sum up, from 2010 to 2015, we had a proportionality principle in place, quietly applied by banking institutions and regulators in Europe. Then, in 2015, out of the blue, the EBA suggested significantly modifying its effects, then backed off and passed the buck to the EU Commission which, in turn, introduced an amendment at the end of 2016 in this regard in its draft modification of the CRD IV. We've had no news since then.

We have therefore been standing in an unusual regulatory no man's land since December 2015 (date of publication of the EBA Guidelines) and all the more since January 2017 (date of their coming into force) where existing rules are called into question but where new rules are not there yet, which has very logically led a certain number of Luxembourg-based banking institutions to wonder whether they were still in a position to apply the proportionality principle as defined in CSSF Circular 11/505.

This is why this new CSSF Circular comes in a very timely manner, removing these second thoughts: in addition to confirming the adoption of the EBA Guidelines, the CSSF has also stated, in a very clear and compelling way, that it "has decided to maintain CSSF Circular 11/505, so that all the requirements that could until now be neutralised (disapplied) will continue to be so until the coming into force of new EU rules in this regard."

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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