Despite recent reforms, the financial services sector still faces a long journey to ensure that weaknesses in its current system are overcome. Institutions must meet the increasing pressures set by regulators and adapt to a culture that the government is endeavouring to instil. On 23 November 2016, the European Commission published a set of proposed revisions to its banking reform package and some of its provisions relating to remuneration policies.
The proposal issued by the European Commission focuses on completing the reform agenda following the previous reforms included in the Capital Requirements Directive 2013 (CRD IV).
The Commission proposes that rules around deferrals, pay-out in instruments and staff with low variable remuneration in smaller, less complex institutions require further clarification. They also highlight an uneven application of proportionality across smaller firms as a result of misaligned interpretations of the rules.
The report specifies that smaller, non-complex institutions and staff with low levels of variable remuneration should be excluded from any rules relating to deferrals and pay-out in instruments. The conditions around what constitutes a ‘small, non-complex’ institution should be harmonised in order to allow equality across all firms. This also extends to what variable figure is considered ‘low’.
By definition, the Commission specifies a small, non-complex institution to be one whose assets equate to a value equal to or less than EUR 5 billion over a four-year period immediately preceding the current financial year. Low variable remuneration is defined as remuneration that does not exceed EUR 50,000 and does not make up more than 25% of a staff member’s annual total remuneration. Member States are free to remove this exemption depending on the nature and scope of the institutions activities or because of national market specificities in relation to the remuneration practices, responsibilities or job profile of the staff member.
The Commission also deems share-linked instruments to fall under the definition of “instruments” when considering an individual’s variable remuneration. Institutions may be required to disclose any benefits they have gained as a result of the rules around proportionality.
The proposal recommends that the EBA update its guidelines to reflect these updates.
Any of the proposed changes, if agreed, will obviously take some time to implement. This is something for the smaller, non-complex institutions to think about, particularly in terms of how they define proportionality and the structure of variable pay.