Credit Agricole SA

 FBF answer
We consider that some definitions should be clarified in particular to be more compliant and consistent with market practices.
a) The definition of “LTI” does not appropriately cover usual cases of LTI awards, and should be completed and clarified. Indeed, in most institutions, LTIs are not multi-year plans with annual grants subject to the achievement of conditions, but incentive rewards awarded at a certain date and deferred over a certain period of time, whose final payments are subject to the achievement of conditions. Indeed, if according to these project guidelines, we had to consider the amounts vested or paid after the achievement of the conditions, it would not only be in contradiction with the previous CEBS guidelines but also prejudicial for the use of this type of instruments due to the uncertainty and the fluctuated value of the instrument, as required by the Directive, over the vesting period (refer Q8).
Consequently, in order to be compliant with the market practices, we suggest defining LTI as “variable remuneration awards deferred over a certain period of time and whose final payments are subject to the achievement of conditions. For the purpose of the ratio calculation, amounts awarded have to be considered at the grant date at their fair (market) value.”
b) Currency exchange rate used for conversion should be the annual average exchange rate of the year to which the remuneration relates, i.e. for 2014 remuneration components used for the determination of 2015 identified staff perimeter, the currency exchange rate should be the average 2014 rate.
French Banks suggest confirming that the currency conversion rate should be the average rate of the performance year to which the remuneration relates.
 CASA view
 FBF answer
The draft guidelines imply a reinforcement of the governance with a stronger role of the remuneration committee and the supervisory board in the process of identification of the MRT, the exemptions, and the assessment of remuneration system and mechanism (ex-ante, ex-post).

The guidelines wording related to the responsibility of the supervisory function regarding remuneration policy goes beyond its legally provided competences under CRDIV, entrusting it with the adoption and review of the remuneration policy in its entirety, not only of the general principles that govern it as stated under CRDIV (art. 92(2)(c)).

In particular, the project guidelines include increasing responsibilities and missions for the remuneration committee. We consider that the remuneration committee should remain responsible to review and approve the remuneration policy and the individual remuneration of the executive general management, but should not be involved in other operational functions in order that it could efficiently assume its supervisory mission.

The guidelines open the potential exemption of the annual independent review for non-significant institutions" which are subsidiaries of a Group. The definition of non-significant institutions should be clarified. The Group’s audit function is competent for managing the annual reviews Group wide that makes additional audit process at subsidiary level unnecessary.
French Banks encourage the EBA to maintain the role of the remuneration committee and the supervisory board as it is defined in CRDIV, i.e. in charge of adopting and reviewing the general principles of remuneration policy and not reviewing the remuneration policy in all details."
 FBF answer
According to the project guidelines § 60, we understand that, for a company belonging to a group, there are three different ways of applying the rules on remuneration: on a consolidated basis, on a sub-consolidated basis and on an individual basis. Concerning the application on an individual basis, the guidelines expressly states that the “competent authorities may make use of the derogation provided for in Article 7 of the CRR in accordance with article 109 (1) of CRD”. Indeed, some member states have set up exemptions to the application on an individual basis, thus being compliant with such provisions.

However, in other parts of the project guidelines, the possibility to exempt some group companies of the application of the rules on an individual basis, as provided for in the CRD, does not seem so clear. For example, § 74 is very confusing and needs to be clarified.

As a consequence, French banks would appreciate clarifications on the application of the requirements in a Group context and would like to ensure that the derogation for an application on a solo basis for subsidiaries included in the supervision on a consolidated basis, as provided for by articles 109 (1) of the CRD and article 7 of the CRR is indeed possible. French banks would also need to have confirmation that companies in a Group that are subject to specific rules (asset management, insurance or reinsurance) do not have to apply rules on CRD remuneration on a consolidated (or sub-consolidated) basis and remain solely governed by their specific sectorial regulation, except for some individuals who have specific functions at the Group level.
If this was not the case, French banks would be concerned by the following issues:
 In a Group context, applying CRDIV provisions on a solo basis to each subsidiary whatever its size or materiality as regards the Group would lead to identify more than 10 times today’s regulated staff:
o This would not be relevant if there is no material impact on the Group risk profile. The application of the regulatory technical standards defined by the EBA for the identification of regulated staff already enables to capture MRTs in all “material business units” at Group level on a worldwide basis, i.e. beyond the EEA.
o This would represent an administrative burden and a source of great complexity (in terms of identification process, implementation of CRD rules on the variable remuneration of these identified staff, public disclosures and reporting to the authorities,…)
 Taking into account application of CRDIV provisions on a sub-consolidated basis is not relevant because sub-consolidation perimeter within a complex Group is not an operational reality but only show an accounting organization.
 Such situation would create an uneven playing field between in-scope and out-of-scope firms. European banking institutions with subsidiaries located outside EEA would have major competitive concerns in particular to maintain the same level playing field and retain their best performers applying these rules in all their subsidiaries located outside EEA. Similarly, subsidiaries located in EEA countries would be confronted to a distortion of competition with their peers which are not part of a Group.
 Employees working within asset management activities, or insurance company identified as MRTs at Group level due to their remuneration threshold or their inclusion in a MBU for the Group would be submitted to the bonus cap, while this is not a requirement in their sectorial regulations. This would lead to major competitive distortions in the insurance and asset management industries. This could also harm the diversification of risks, as some non CRD activities in diversified institutions would lose their competitiveness. French banks’ position is that subsidiaries such as AIFMs&UCITs asset managers and insurance providers should be governed solely by their specific sectorial regulations.
 Moreover, such approach would go against the principle that smaller entities be supervised by national competent authorities. National authorities are the best placed to identify the risks caused by activities of smaller entities, which often only have domestic activities and serve domestic clients. The suppression of the proportionality principle means in effect that national supervisors would lose any space of interpretation to assess the risks caused by certain employees in firms that they nevertheless monitor and supervise. This is not consistent with the way banks and investment firms’ supervision is designed in the EEA and does not consider features specific to a domestic market that would allow some flexibility.
French Banks would request that the EBA maintains the application of the proportionality principles applicable and for harmonization purpose, would suggest:

1 – defining a single common threshold of 10 B€ of total assets at EEA level to promote a consistent application of the rules between member states.
2- expressing that dispositions are applicable at Group level or solo basis level without taking into account sub-consolidated perimeter that has not always operational reality in a large Group.
3 – exempting from the bonus cap employees working within asset management activities, or insurance company who will be identified as MRTs at Group level due to their remuneration threshold or their inclusion in a MBU for the Group, while this is not a requirement outside credit institutions. Otherwise, this would lead to major competitive distortions in the insurance and asset management industries.
 FBF answer
As a result of the EBA's reinterpretation, the benefit of proportionality is significantly reduced and proposed changes to the application of proportionality would no longer allow firms to disapply requirements relating to deferral, payment in instruments, retention periods, …for employees whose variable compensation is low and who have a very limited impact on the risk profile of the Group and of the subsidiary.
The application of the proportionality principle was permitted under CRDIII and the text has not changed under CRDIV. Proportionality can lead to neutralization as stated in recital (66) of the Directive 2013-36-UE “The provisions of this Directive on remuneration should reflect differences between different types of institutions in a proportionate manner, taking into account their size, internal organization and the nature, scope and complexity of their activities. In particular it would not be proportionate to require certain types of investment firms to comply with all of those principles. ”
Contesting this principle would represent a significant change compared to the current practices of the vast majority of national competent authorities which have implemented the proportionality principle in various ways (e.g. through the use of de minimis thresholds or recognition of the immaterial nature of certain subsidiaries or specific treatment of businesses like investment management, enabling them to compete in a broader market place, etc.).
By removing the so-called neutralizations provided in the previous CEBS Remuneration Guidelines and modifying the application of the proportionality principle as proposed, the EBA is effectively creating binding, minimum standards that will apply indiscriminately and fail to reflect the nuances of firms’ specific situations.
If arrangements for small amounts of variable compensation were no longer possible, this would have major impacts on a large number of employees with the lowest remuneration levels who have very low impact on the risk profile of the company.
If CRDIV constraints had to be applied to each staff member identified at consolidated as well as at individual level, it would be very difficult to attract and retain staff members in functions, businesses or countries which have low variable remuneration levels. In practice, this could lead to increase fixed pay which would neutralize all CRDIV objectives to have a part of the remuneration at risk and to use variable pay as an adjustment factor in downturns.
The end of proportionality and neutralization thresholds would lead to apply all CRDIV constraints to a much wider and diversified perimeter of staff:
o Conduct thorough identification process based on EBA regulatory technical standards
o Put in place deferral schemes and payment in instruments
o Implement adequate governance (implication of control functions; remuneration committees and shareholders)
All that would require IT developments, additional human resources, tax and accounting follow-up, as well as communication actions. An estimation of these implementation costs is very complex but there is no doubt that they would be very significant and without any efficient relation with the amounts of variable compensation in particular within the small and less complex institutions (see in particular answer to question 16 for more details on the constraints generated by a payment of variable remuneration in shares).

French Banks would request that the EBA maintains the application of the proportionality principles as was allowed within the previous CEBS remuneration guidelines, with the possible neutralization of some requirements, mainly on payment conditions (i.e. deferral and instruments). In addition, for harmonization purpose, they would propose to define a single de minimis threshold that could be applicable consistently to the EU banking industry, below which requirements relating to deferral, payment in instruments, retention periods could be neutralized. A threshold of 120K€ would seem reasonable, taking into account market considerations and operational constraints in terms of management of deferral payments over at least 3 years in several different countries in large institutions.
 CASA view
The removal of the proportionality principle combined to the cancellation of the neutralization threshold at individual level would lead to a deferred population of 5 335 employees vs. 360 persons currently.
 CASA view
Regarding identification process, the guidelines wording related to the responsibility of the supervisory function goes beyond its legally provided competences under CRD IV, entrusting it with a full involvement in the identification process in its entirety whereas it should only review general principles that govern this process as stated under CRD IV (art.92(2)(C)).
 CASA view
 CASA view
For the calculation of the ratio between the variable and the fixed component of remuneration, we recommend not considering the vested part of LTI but rather taking into account the actual value of the total LTI at granting date accordingly to IFRS methodology. The amount of the vested part is known after the granting of the annual variable remuneration for N-1 exercise, this timing sequence would prevent the banks from complying with an accurate fixe/variable ratio calculation.
 FBF answer
French banks consider that the definition of the allowances is in contradiction with local labor law. Besides, even the base salary does not comply with the very strict definition. Indeed, it is based not only on the employee’s responsibilities but also on his/her expertise and experience. In addition, it can change, even if the job position remains the same.
 CASA view
 CASA view
Practically, most of the severance payments are ruled by labour collective agreements which the banks have to comply with. These agreements cover the vast majority of employees only excluding senior managers and executives. For those employees, severance pay is determined on a case by case basis by HR department within the framework of company severance policy. Termination packages and individual arrangements may include strict confidentiality provisions which cannot be disclosed to any other third party whether they are control functions or other internal departments. Control functions can only validate the severance framework policy.
 FBF answer
Concerning the requirement regarding personal hedging and according to the guidelines, self-certification would be no more sufficient and controls would have to be implemented based on the bank account statements of the employees. This could prove very difficult to put in place due to legal constraints in terms of access to personal data and would be complicated from an operational point of view. This process may raise issues relating to banking secrecy.
French banks suggest including this prohibition of personal hedging in the compensation policy and in the plan rules provided annually to the beneficiaries, mentioning in addition that any prohibited action would be considered as an act of misconduct implying the application of malus and clawback clauses. According to us, such assumption would be sufficient refraining deviant actions.
 CASA view
 CASA view
 CASA view
Due to proportionality principle, the definition of the minimum deferred percentage and of the length of the deferred period for employees should be the responsibility of the institution.
 FBF answer
According to the project guidelines, listed companies must use shares rather than share equivalents. Payments in a form of share-linked instruments would no longer be possible for listed companies. Moreover, we understand that there should be a mixed balance for payment in instruments between shares and contingent capital instruments.

It is a major concern for major French listed banks which until now were used to paying the part in instruments via share-linked instruments (cash indexed to the value of the shares) in particular due to:
• the equivalence in terms of risk alignment between shares and shares-linked instruments
• legal/regulatory impediments existing in some countries to use instruments (if the company is not listed in the country, the employees cannot receive shares)
• the complexity of the management of shares awards in an international institution, indeed:
- re-invoicing of charges linked to share issues is very complicated from an accounting and tax standpoint
- it could lead to confidentiality issues in countries where a very limited number of employees are identified
- it is very difficult to follow employees subject to international mobility and different tax sourcing rules
- the requirements are more complex in terms of securities regulation (information to the market authorities; issue of prospectus and other publication constraints)
- the issue or purchase of shares is also complicated and uncertain in terms of governance (approval to obtain from the shareholders’ meeting which can refuse or cap their authorization at a lower amount than that required)
• the IT and HR costs and operational complexity it would generate:
- costs linked to the evolution of IT remuneration tools to integrate functionalities for deferral and pay-out in instruments on variable part;
- costs related to the increase of HR staff worldwide to manage the application of deferral and pay-out in instruments to a much wider MRTs population;
- costs linked to (i) the enlargement of the service contract with the securities intermediary in charge of the management of the distribution of shares and (ii) the opening of deposit accounts for all regulated staff, with potentially some restrictions in some countries;
- costs related to the management of the withholding of social charges and income taxes on the employees’ bank accounts for the parts of variable remuneration paid in instruments (cash not always available to fund these charges and taxes)…

Consequently, French Banks would appreciate that EBA maintains flexibility and simplicity on the use of equity instruments for the payment of variable compensation. Indeed, the payment into share-linked instruments can be applied uniformly on a worldwide basis, which is not the case of shares that can be subject to specific legal, regulatory, tax and accounting constraints and formalities according to the countries. In the same time, it has exactly the same effect as payment into shares in terms of risk alignment with the long-term interests of the institutions and with those of the shareholders. Finally, it is also operationally much less complex.
According to the project guidelines, if contingent capital instruments could reinforce the alignment of the employees with the credit quality of the institution, their granting would be costly and very complicated as these instruments are dedicated to large institutional investors and not to individuals. In particular such instruments:
- have a perpetual maturity with a potential date of first call after 5 years (not aligned with remuneration schemes)
- are not meant to be repurchased by the institution itself (regulatory constraints)
- there is no secondary market for employees to sell these types of instruments at the end of the retention period (liquidity very difficult to ensure).
French banks propose that the EBA maintains flexibility on the use of such instruments which are quite complex to put in place in particular for “retail” populations. The possibility to use them for specific populations should be offered but not the obligation to put them in place for the entire MRT population. It should also be possible to use synthetic instruments as for shares.
 CASA view
The Guidelines are creating stricter rules than the ones of CRD IV, art. 94 (1) (l) .
50% at least of the total variable remuneration is to be paid in shares or equivalent ownership interest however it is never specified that the 50% must apply to non-deferred and deferred parts. Each part should include equity instruments but not necessarily in the 50% proportion.
Moreover, the obligation to pay 50% of the non deferred variable remuneration in instruments is not mentioned in the French transposition of the CRD IV : art. L. 511-81 of the Ordonnance n° 201-158 20 February 2014. According to national law, 50% of the global variable remuneration is to be paid in instruments independently of the deferred or non-deferred parts.
 FBF answer
The retention period during which the instruments awarded have been vested but cannot be sold would be 1 year instead of 6 months. This new requirement which seems to be longer than the market practices of most EU countries will generate tax, treasury and HR issues for the employees concerned without improving the alignment of incentives with the long-term interests of the institution. Indeed, in many countries, employees would have to be taxed at vesting date, while the underlying instruments can only be sold 1 year later (too late for the tax payment) with a discrepancy between the instrument’s price used for the tax payment at vesting date, and the price of the same instrument 1 year later.
French banks would suggest that the appropriate retention period shall clearly be defined as a 6-month retention period to ensure a consistent application among EEA member states, or at least inferior to one year to avoid tax penalties to employees.
 CASA view
 CASA view
 CASA view
 CASA view
Direct additional costs will mainly come from additional full time employees dedicated to administrative work load linked to the extension of the identified staff population (number of FTE will depend on the quantification of the extension) and from extra IT costs necessary to adapt current remuneration tools. This adaptation is necessary in order to manage the complexity of the new rules impacting remuneration structure (functionalities for deferral and pay-out in instruments on variable part, tax team expertise to manage the withholding of social charges and income taxes on the employees’ bank accounts for the parts of variable remuneration paid in instruments, costs linked to (i) the enlargement of the service contract with the securities intermediary in charge of the management of the distribution of shares and (ii) the opening of deposit accounts for all regulated staff, with potentially some restrictions in some countries).
Sizeable indirect negative consequences are also expected if the guidelines are implemented as such:
- Complexity of remuneration policies lacking readibility;
- Competition issues coming from new remuneration rules worsening the uneven playing field for EEA based institutions compared to their peers based in third countries.
François Galland