15 October 2014
The European Banking Authority (EBA) published today the findings of its investigation regarding discretionary remuneration practices across the EU banking sector. The report shows that some institutions have classified the so-called ‘role-based' allowances in a way that increases the fixed component of remuneration, which may impact on the limitation of the bonus cap. As a result of this analysis, the EBA issued an Opinion to the European Commission and EU competent authorities calling for supervisors to ensure that institutions' remuneration practices on allowances comply with EU legislation.
According to the EBA investigation, competent authorities across the 28 EU Member States have reported that 39 institutions use ‘role-based' or ‘market value' allowances, which the institutions classify as fixed remuneration. However, the EBA found that in most cases institutions had topped up the fixed remuneration of their staff and had introduced discretionary ‘role based' allowances which have an impact on the limit of the ratio between variable and fixed remuneration required by the EU Capital Requirements Directive (CRD IV).
The report has been carried out within the framework of the EBA's market monitoring and assessment tasks and following a request by the European Commission to investigate the use of the so-called ‘role-based' allowances, which were introduced after the EU's decision to limit the variable remuneration to 100% of the fixed component (200% with shareholders' approval).
The EBA explained that to be classified as fixed remuneration, these role-based allowances should have the following specific characteristics: be permanent, i.e. maintained over a period tied to the specific role and organisational responsibilities for which they are granted; pre-determined, in terms of conditions and amount; non-discretionary, non-revocable and transparent to staff. Whereas findings in the report showed that most of the allowances, which were the subject of the EBA investigation, did not fulfil the conditions for being classified as fixed remuneration, namely with respect to their discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification.
The Authority stated in an official opinion, based on the findings in the report and also published today, that if role-based allowances are discretionary, not predetermined, not transparent, not permanent, or revocable, they should not be considered as fixed remuneration but should be classified as variable in line with CRD IV. The EBA clarified that institutions making use of such allowances should change their remuneration policies and reclassify the ratio between the fixed and the variable component so as to comply with EU legislative requirements. Also, EU competent authorities that are aware of role-based allowances with the above characteristics being used in their jurisdictions are expected to take all the appropriate supervisory actions to reflect the findings of the EBA Opinion. They should ensure that these are correctly classified as variable remuneration, so as to make certain that institutions are not circumventing the bonus cap and other requirements laid down in the EU Capital Requirements Directive.
EU competent authorities have until 31 December 2014 to use all necessary supervisory measures to ensure institutions review their remuneration policies so as to comply with the criteria highlighted in the EBA report and with the CRD IV requirements.
The EBA is currently revising its Guidelines on remuneration policies and practices, which will be consulted upon by the end of 2014 and finalised by the first half of next year. The Guidelines will provide EU competent authorities with a more detailed regulatory tool.