Question 5:
The possibility of ‘neutralising’ certain requirements, as provided by the CEBS document of 10 December 2010 under the prior regulation, does not seem to be applicable any longer; the document, however, does seem to propose an amendment to regulations that would allow such application.
Question 5 (page 40 of the document) asks the entities to value the cost of doing away with those ‘neutralisations’ for the entities applying them.
The same question also asks for comments on how the proportionality principle is generally viewed in the document.
Regarding this matter, we are concerned that heading 72 should prevent the application of the proportionality principle in the distribution of fixed and variable remuneration regardless of the staff involved.
Therefore, the treatment of certain groups (for instance, traders, (sales) analysts or portfolio managers), whose remuneration is in certain cases essentially variable, seems to be in serious jeopardy if this is the criterion that is going to be applied.
On the other hand, Article 4.2 of Regulation 604/2014 allows certain staff members not to be included among the ‘identified staff’ because they only carry out activities in a business unit that is not material, or because they have no material impact within a material business unit.
With a few specifications included in this Regulation, entities must seek the acquiescence of the relevant authority (in this case the Spanish National Securities Market Commission, CNMV) in order to exclude these staff members from the remuneration policy.
Therefore there are two options for these groups of staff members to be adequately remunerated: (i) that with the acquiescence of the CNMV they are not included among the ‘identified staff’ or (ii) that, being among that group, the application of the proportionality principle to that group is allowed; to this end, section 72 of the EBA Guidelines would have to be amended.
For this purpose, the Group proposed the following in relation to the proportionality principle and as an answer to question 5:
1. The proportionality principle should not be applied only to the size of entities but also to the ‘nature’ of the activities they carry out.
At the same time, Article 92.2 of Directive 2013/36 is clear in that it demands that remuneration policies be aligned with the business strategy.
Therefore the business strategy, which is directly influenced by the nature of the activities developed by entities, must be a decisive item in the design of remuneration policies, such that these polices (i) are aligned with the business strategy and (ii) avoid excess risk for the entity.
2. There are activities carried out by investment firms where the nature of those activities demands that remuneration be essentially variable, if not exclusively variable. This is the case of traders at customer desks, certain sales analysts and certain portfolio managers.
The company revenues will be conditional upon how those staff members do their job, therefore the higher the revenues the more they get paid (conversely, the lower the revenues…).
Due to this variable remuneration mechanism, these staff members may earn amounts that at small entities may be at the same level or even above what the Senior Management and Directors of the Company earn.
In these cases, establishing a fixed wage of the amount required to allow 1:1 or 1:2 would simply burden small and medium entities with fixed costs so high that it would render them unfeasible. This is a case where the remuneration policy would render the continuation of the company impracticable. It would therefore be a remuneration policy contrary to the nature of the company’s activities and essentially unaligned with the business strategy, to the extent of making it unfeasible.
We would reach the contradictory result that a theoretically sound remuneration policy lead the entity to unfeasibility.
On the other hand, in a scenario of open, competitive markets, where talent can shift easily from one place to another, attention should be paid and it should be closely analysed whether there is an actual risk of talent flying in connection with these activities where remuneration is variable by nature.
3. Because of this, it is essential that the text of section 72 be toned down, allowing these types of staff members to be excluded from the group of ‘identified staff’ when the nature of their activities is a decisive item for the application of the proportionality principle.
Generally the EBA should pay closer attention to the business profile of investment firms regarding this matter, in order to effectively adapt remuneration policies to allow the healthy development of the corporate purpose of entities, where the provision of investment services is of a completely different nature to that of banking activities.
In this respect, section 82 must also be adapted, in order to very clearly express that the type and nature of the activities of entities must determine how to apply the proportionality principle, and not only the size of the entities.