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Bankers' bonuses
Amended rules finally agreed at EU level
 
Back in November 2016, the Commission released a number of amendments to CRD IV aimed at clarifying the exact scope of some of the remuneration provisions as the European Banking Authority’s (EBA) restrictive views raised some concerns among stakeholders.

It took over two years for the EU institutions to agree on these amendments, partly because they were then included in the so-called “banking package”: a much more ambitious and controversial set of measures aimed at strengthening banks’ resilience and reducing risk. An agreement was finally reached on 4 December 2018 and it took a few more discussions and weeks for the final texts to be released.

The agreed changes to bankers‘ bonuses‘ rules, as set out in the text published on 14 February 2019 (so-called CRD V, updating CRD IV) are as follows:

Proportionality

The proportionality principle, which is intended to reduce the administrative burden of some of the remuneration rules for smaller and less complex institutions and for staff with low variable remuneration is confirmed. This leads to an exemption from some of the remuneration rules (i) for smaller institutions - defined as institutions that are not large institutions as defined by Regulation (EU) No. 575/2013 and the value of the assets of which is on average and on an individual basis equal to or less than EUR 5bn over the four-year period immediately preceding the current financial year - as well as (ii) for staff members whose annual variable remuneration does not exceed EUR 50,000 and does not represent more than one third of the staff member's total annual remuneration. Member states have the possibility to lower or to increase the EUR 5bn threshold to up to EUR 15bn provided certain (specified) criteria are met.

Under the revised European approach, the rules on the use of non-cash instruments (for both remuneration and discretionary pension benefits) and deferrals will not apply in these exempt cases, whereas the so-called bonus cap (the maximum ratio between fixed and variable remuneration) will continue to apply to all material risk takers, irrespective of the size of the institution they work for or the level of their variable remuneration.

It remains to be seen how the revised European approach will impact the proportionality regime under the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung – InstitutsVergV). While the general distinction between significant and non-significant institutions (with the relevant threshold of EUR 15bn) may be in principle upheld, the new approach will reinforce the regulatory trend to distinguish between different types of institutions (CRR/non-CRR institutions, large/small institutions) and a corresponding set of remuneration requirements applicable to each type of institution. In this respect, the envisaged new European approach to proportionality for investment firms will further add to the complexity.

Use of share-linked instruments

The agreed text confirms that both listed and non-listed institutions will be able to use share-linked instruments in the remuneration mix (whereas a strict interpretation of CRD IV had led the EBA to consider that listed institutions could only use shares and no share-linked instruments). This approach already corresponds to current regulatory practice in Germany.

Consolidation

There was a conflict situation for subsidiaries which are not institutions and therefore not subject to CRD IV on an individual basis but caught as part of a group while at the same time subject to other remuneration requirements pursuant to the relevant sector-specific legislation (eg AIFMD). The agreed revised text will make the sector-specific rules prevail.  As a rule, CRD V provisions will not apply on a consolidated basis to such subsidiaries.

Nevertheless, some individuals working for these subsidiaries may still be in scope for CRD V where they are mandated to perform professional activities in the performance of specific services (such as asset management or portfolio management) which trigger their qualification as “material risk taker” at the level of the banking group. This may occur, in particular, as part of a delegation/outsourcing arrangement concluded between the subsidiary employing the staff and another institution in the same group.

To the extent that such (eg AIFMD) subsidiaries and their employees would therefore be in scope for the group-wide (material risk taker) risk analysis, this may trigger a change to the group-wide remuneration rules under Section 27 InstitutsVergV. Otherwise, the German approach to the group-wide application of CRD remuneration rules can generally be maintained. 

List of material risk takers and extended deferral period

Other changes include a new list of staff which shall be considered as material risk takers. The EBA is tasked to develop new draft regulatory technical standards setting out the criteria for identifying such categories of staff whose activities have a material impact on the institution's risk profile (including criteria such as "material business unit" and "significant impact on the relevant business unit's risk profile").

Also, the general deferral period is going to be extended (not less than 4 to 5 years - instead of 3 to 5), while the specific deferral period for members of management bodies and senior management (not less than 5 years) will be maintained.

Gender neutral policies

CRD V introduces a requirement for remuneration policies to be gender neutral as part of the EU’s push for equal pay for equal work.

Next steps

Formal adoption by the European Parliament is scheduled to take place mid-April. The publication in the official journal will follow. Member states will then have 18 months for transposition. This probably means that the new provisions will be effective from 1 Jan 2021. New EBA guidelines are expected to be published in the meantime, as the agreed text asks the regulator to adopt such guidance with a view to facilitate the implementation of the new provision on proportionality. Until then, the CRD IV provisions remain in force as well as the 2015 EBA guidelines which entered into force in 2017.




“CRD V introduces a revised approach to proportionality and the identification of material risk takers.”




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