Response to consultation Paper on Draft RTS on classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used the purposes of variable remuneration
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In addition, we believe that the provisions requiring that no distributions arising from deferred instruments (including fund deferrals) should be paid to staff during deferral periods may lead to misalignment between investors and recipients of deferred instruments. We therefore encourage the EBA to reconsider these provisions so as to ensure the fair and equal treatment of investors and recipients of deferred instruments.
Firstly, the timeline for finalising these RTS is a significant concern. The EBA states that it will submit the draft RTS to the European Commission in November 2020. On the assumption that the normal EU legislative processes will be followed, the Commission will then consider and formally adopt the RTS, and thereafter present the RTS to the European Parliament and Council of the EU for consideration under the EU’s non-objection procedure, which can take up to three months to complete. On the assumption that there would be no objection to the RTS from the co-legislators (and this cannot be guaranteed), it is very likely that firms subject to the RTS would only have absolute clarity and legal certainty as to the final provisions and application of the RTS part way into 2021.
For Invesco, where our performance year runs January-December, this would be particularly problematic as we do not believe we would have sufficient clarity, nor the legal certainty, to be able to communicate the new rules on remuneration to relevant staff in advance of the 2021 performance year. As regards communicating the changes to and application of the new rules on remuneration during the performance year, we do not believe this to be feasible operationally due to the significant process and system adjustments required by the RTS given the large number of MRTs subject to specific pay-out rules.
In addition, the new provisions relating to instruments are likely to significantly increase the administrative resource requirements for multiple disciplines such as HR, Compensation and Executive Compensation, Products and Finance. These would include, for example, additional requirements for deferral administration systems, separated allocation processes during year-end compensation cycles and extensive internal communication activities. Compliance with the RTS would also require updating and ensuring sufficient access to relevant product expertise.
Question 1: Are the provisions within Article 1-5 sufficiently clear?
Article 32(1)(j)(iv) of the Directive on the prudential supervision of investment firms (IFD) – which states that at least 50% of variable remuneration can consist of ‘non‐cash instruments which reflect the instruments of the portfolios managed’ – allows firms to use existing fund deferral arrangements as provided for under the UCITS Directive. However, the overlap in the MRT populations identified under multiple regimes (e.g. UCITS and new prudential regime for investment firms) requires the ability to apply same instrument vehicles to manage/administer deferral arrangements and instrument requirements in order to avoid creating further complexity and distortion in remuneration structures.In addition, we believe that the provisions requiring that no distributions arising from deferred instruments (including fund deferrals) should be paid to staff during deferral periods may lead to misalignment between investors and recipients of deferred instruments. We therefore encourage the EBA to reconsider these provisions so as to ensure the fair and equal treatment of investors and recipients of deferred instruments.
Question 2: Is it appropriate to continue to require the same conditions for the use of AT1, Tier 2 and Other Instruments as under the current legislative framework?
-Question 3: Are the provisions in Article 6 appropriate and sufficiently clear? Where respondents are of the view that the draft RTS should define a set of specific arrangements rather than providing conditions that such arrangements should meet, comments are most helpful, when they clearly describe the alternative arrangements that investment firms desire to use to ensure that variable remuneration is aligned with the long-term interest of the investment firm and its risk profile.
-Question 4: Do respondents agree with the findings of the impact assessment? Where respondents have identified additional costs or burdens created by the draft RTS, it would be most helpful if respondents could specify and, where possible, quantify separately the costs for the implementation of the provision and the costs for the ongoing application of the provisions.
The Executive Summary of the EBA consultation paper (EBA/CP/2020/08) states that it is “assumed that institutions will have to comply with the RTS with regard to the remuneration awarded for the performance year 2021”. However, we believe that the intention to apply these RTS for the performance year 2021 presents a number of issues.Firstly, the timeline for finalising these RTS is a significant concern. The EBA states that it will submit the draft RTS to the European Commission in November 2020. On the assumption that the normal EU legislative processes will be followed, the Commission will then consider and formally adopt the RTS, and thereafter present the RTS to the European Parliament and Council of the EU for consideration under the EU’s non-objection procedure, which can take up to three months to complete. On the assumption that there would be no objection to the RTS from the co-legislators (and this cannot be guaranteed), it is very likely that firms subject to the RTS would only have absolute clarity and legal certainty as to the final provisions and application of the RTS part way into 2021.
For Invesco, where our performance year runs January-December, this would be particularly problematic as we do not believe we would have sufficient clarity, nor the legal certainty, to be able to communicate the new rules on remuneration to relevant staff in advance of the 2021 performance year. As regards communicating the changes to and application of the new rules on remuneration during the performance year, we do not believe this to be feasible operationally due to the significant process and system adjustments required by the RTS given the large number of MRTs subject to specific pay-out rules.
In addition, the new provisions relating to instruments are likely to significantly increase the administrative resource requirements for multiple disciplines such as HR, Compensation and Executive Compensation, Products and Finance. These would include, for example, additional requirements for deferral administration systems, separated allocation processes during year-end compensation cycles and extensive internal communication activities. Compliance with the RTS would also require updating and ensuring sufficient access to relevant product expertise.