European Federation of Building Societies (EFBS)

According to paragraphs 2 and 4 of the Draft Guidelines, the EBA Guidelines will apply to institutions on an individual, sub-consolidated and consolidated basis, including their subsidiaries. This encompasses all subsidiaries (including “non-banks” and offshore entities), irrespective of their business activity, their place of establishment, and their significance and relevance to the risk profile of a group of institutions. This broad understanding is reflected in the definition of “staff” under paragraph 6 g): (“all employees of an institution and its subsidiaries”).
The inclusion in the Guidelines’ scope of application of subsidiaries not subject to the CRD, in accordance with Article 92 ff., is based on the wording of Article 109(2) CRD IV and to that extent is unobjectionable. However, it also seems advisable to introduce an appropriate restriction based on the principle of proportionality pursuant to Article 92(2). The permissibility of appropriate national regulations allowing such restrictions – as currently provided for in Section 27(3) of the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung – IVV), for example – would be welcome. Pursuant to the IVV, a subordinated company may not be considered when establishing the group-wide remuneration strategy provided, for example, that the subordinated company is not an institution and does not maintain business relations with the superordinated company in a way that it has to render significant services for the latter, and the business activities of the subordinated company have a minor or no impact on the overall risk profile of the group. Similar clarification in the EBA Guidelines would be welcome.
Due to the broad definition of “staff” contained in paragraph 6 g) of the EBA Guidelines (“‘Staff’ are … any other person acting on behalf of the institution and its subsidiaries”), a lack of linguistic clarity could well arise. Here, the EBA should make it clear that this naturally does not mean persons who work on a self-employed basis for an institution or its subsidiaries, such as freelance management consultants or commercial agents. It would be both inappropriate and incompatible with national civil and commercial law if this category of person were governed by EBA Guideline-compliant remuneration regulations every time they were engaged by an institution.
Sections 8 and 12 provide for a clear distinction with regard to the variable remuneration for various categories of staff of all institutions, with performance by the staff member, business unit or institution as a whole being taken into account. Different rules are to apply to various groups of risk takers according to the impact that they have on the institution’s risk profile, and a clear distinction is to be made between staff of operating business units, corporate and control functions. Further heightening the complexity, paragraphs 205 and 211 contain additional provisions dealing specifically with variable remuneration for control functions’ staff.
Besides the partial lack of clarity in these distinctions and questionable allocation of staff to the aforementioned functions, the provisions are likely to lead to fragmentation of institutions’ remuneration rules, resulting in different qualitative and/or quantitative remuneration parameters. This will require considerable effort which is quite disproportionate to the level of risk reduction thus achieved, especially for smaller institutions or specialised credit institutions such as the Bausparkassen.
In the EFBS’s view, an appropriate restriction that is justified by the principle of proportionality pursuant to Article 92(2) CRD IV and by the overarching regulatory objective of risk reduction can potentially be achieved if the selection, if necessary, of parallel remuneration parameters for staff from different business units is regarded as impermissible only if it gives rise to a conflict of interest. By contrast, the provisions envisaged in the EBA’s Draft Guidelines create the risk, especially for smaller institutions, of a general avoidance of variable remuneration for staff and risk takers. This would not only result in considerable competitive disadvantages during staff recruitment compared with large institutions (with variable remuneration), but would also be disadvantageous for the institution in the event of a crisis, as the institution concerned would have no scope to reduce or abolish variable remuneration as a means of restoring stability.
The Draft Guidelines’ detailed provisions on the clear distinction that should be made with regard to the variable remuneration for different categories of staff are therefore likely to lead to excessive complexity in institutions’ remuneration arrangements. The EFBS therefore opposes the application of these provisions.
Furthermore, in paragraph 58 f. (“Control functions”), the EBA states that the remuneration policy should provide incentives for staff in control functions to deliver the best performance in their role. In our view, it is sufficient, in this context, to specify that the remuneration policy for staff in control functions should not conflict with their role or be conducive to the emergence of conflicts of interest. Positive incentives should be permitted, but should not be prescribed as mandatory. This applies especially to non-significant institutions whose remuneration policies are, almost exclusively, based on fixed remuneration.
Accordingly, Section 14.2 (“Remuneration of control functions”), which states that the remuneration of these staff should be predominantly fixed, should additionally specify that exclusively fixed remuneration is permissible as well. The same should apply to the remuneration of staff whose professional activities have a material impact on the institutions’ risk profile (“identified staff”) under Section 15 (“remuneration policy”).
According to paragraphs 2 and 4 of the Draft Guidelines, the EBA Guidelines will apply to institutions on an individual, sub-consolidated and consolidated basis, including their subsidiaries. This encompasses all subsidiaries (including “non-banks” and offshore entities), irrespective of their business activity, their place of establishment, and their significance and relevance to the risk profile of a group of institutions. This broad understanding is reflected in the definition of “staff” under paragraph 6 g): (“all employees of an institution and its subsidiaries”).
The inclusion in the Guidelines’ scope of application of subsidiaries not subject to the CRD, in accordance with Article 92 ff., is based on the wording of Article 109(2) CRD IV and to that extent is unobjectionable. However, it also seems advisable to introduce an appropriate restriction based on the principle of proportionality pursuant to Article 92(2). The permissibility of appropriate national regulations allowing such restrictions – as currently provided for in Section 27(3) of the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung – IVV), for example – would be welcome. Pursuant to the IVV, a subordinated company may not be considered when establishing the group-wide remuneration strategy provided, for example, that the subordinated company is not an institution and does not maintain business relations with the superordinated company in a way that it has to render significant services for the latter, and the business activities of the subordinated company have a minor or no impact on the overall risk profile of the group. Similar clarification in the EBA Guidelines would be welcome.
Due to the broad definition of “staff” contained in paragraph 6 g) of the EBA Guidelines (“‘Staff’ are … any other person acting on behalf of the institution and its subsidiaries”), a lack of linguistic clarity could well arise. Here, the EBA should make it clear that this naturally does not mean persons who work on a self-employed basis for an institution or its subsidiaries, such as freelance management consultants or commercial agents. It would be both inappropriate and incompatible with national civil and commercial law if this category of person were governed by EBA Guideline-compliant remuneration regulations every time they were engaged by an institution.
Sections 8 and 12 provide for a clear distinction with regard to the variable remuneration for various categories of staff of all institutions, with performance by the staff member, business unit or institution as a whole being taken into account. Different rules are to apply to various groups of risk takers according to the impact that they have on the institution’s risk profile, and a clear distinction is to be made between staff of operating business units, corporate and control functions. Further heightening the complexity, paragraphs 205 and 211 contain additional provisions dealing specifically with variable remuneration for control functions’ staff.
Besides the partial lack of clarity in these distinctions and questionable allocation of staff to the aforementioned functions, the provisions are likely to lead to fragmentation of institutions’ remuneration rules, resulting in different qualitative and/or quantitative remuneration parameters. This will require considerable effort which is quite disproportionate to the level of risk reduction thus achieved, especially for smaller institutions or specialised credit institutions such as the Bausparkassen.
In the EFBS’s view, an appropriate restriction that is justified by the principle of proportionality pursuant to Article 92(2) CRD IV and by the overarching regulatory objective of risk reduction can potentially be achieved if the selection, if necessary, of parallel remuneration parameters for staff from different business units is regarded as impermissible only if it gives rise to a conflict of interest. By contrast, the provisions envisaged in the EBA’s Draft Guidelines create the risk, especially for smaller institutions, of a general avoidance of variable remuneration for staff and risk takers. This would not only result in considerable competitive disadvantages during staff recruitment compared with large institutions (with variable remuneration), but would also be disadvantageous for the institution in the event of a crisis, as the institution concerned would have no scope to reduce or abolish variable remuneration as a means of restoring stability.
The Draft Guidelines’ detailed provisions on the clear distinction that should be made with regard to the variable remuneration for different categories of staff are therefore likely to lead to excessive complexity in institutions’ remuneration arrangements. The EFBS therefore opposes the application of these provisions.
Furthermore, in paragraph 58 f. (“Control functions”), the EBA states that the remuneration policy should provide incentives for staff in control functions to deliver the best performance in their role. In our view, it is sufficient, in this context, to specify that the remuneration policy for staff in control functions should not conflict with their role or be conducive to the emergence of conflicts of interest. Positive incentives should be permitted, but should not be prescribed as mandatory. This applies especially to non-significant institutions whose remuneration policies are, almost exclusively, based on fixed remuneration.
Accordingly, Section 14.2 (“Remuneration of control functions”), which states that the remuneration of these staff should be predominantly fixed, should additionally specify that exclusively fixed remuneration is permissible as well. The same should apply to the remuneration of staff whose professional activities have a material impact on the institutions’ risk profile (“identified staff”) under Section 15 (“remuneration policy”).
In its statements on the application of the proportionality principle, the EBA makes it clear that in general, all institutions should comply, with regard to their remuneration policy and practices, with the principles set out in the CRD. According to the EBA, the question is not if but how proportionality is taken into account within the remuneration system. The approach hitherto adopted, namely non-application of certain provisions by non-significant institutions (known as neutralisation), can then no longer be maintained. In future, according to the EBA, all non-significant institutions, irrespective of their less complex, lower-risk structures, should conduct and document an annual review in respect of “identified staff”, for example.
In the EBA’s Draft Guidelines, the principle of proportionality enshrined in Article 92(2), Article 94 and recital 66 CRD IV is interpreted as meaning that the provisions should apply to the remuneration policies and practices of all institutions, albeit with some flexibility for the rules to be adapted to the scope and complexity of institutions’ activities. This new interpretation is not in line with the approach hitherto applied; until now, the dual principles of “proportionality among institutions” and “proportionality among categories of staff” have applied, as set forth in the Guidelines published by the Committee of European Banking Supervisors (CEBS), the forerunner to the EBA, in 2010.
The EBA’s changed position on the proportionality principle pursuant to Article 92 ff. CRD IV would put a question mark over the approach hitherto adopted. The application of all the requirements to smaller, non-significant institutions – which would affect the majority of Bausparkassen – would have extremely adverse consequences. The institutions concerned would find it almost impossible to implement the complex rules. In groups of institutions whose staff are, for the most part, paid according to collective agreements, the effort involved in implementing the rules would be quite disproportionate to the variable remunerations concerned. The identification of risk takers, too, would simply require smaller institutions to make additional effort without any associated benefit, given that the relatively low level of variable remuneration would not create any incentives of supervisory relevance. In consequence, the regulatory purpose defined in recital 66 CRD IV, namely to ensure that the design of remuneration policies is integrated in the risk management of the institution, would not be achieved. In addition, the sector-wide application of deferral to all staff and the extended minimum retention period for all banks would worsen the competitive disadvantage in the recruitment of specialists and managers compared with other sectors.
The EBA has recognised this fundamental problem and therefore intends to propose legislative amendments to the European Commission which, based on its narrow interpretation, would allow greater leeway in the application of the more stringent rules on remuneration. In addition to the present consultation, it has therefore circulated a questionnaire to the credit industry requesting an estimate of the impact and costs arising from parallel implementation of the CRD IV provisions, especially for those institutions which until now have benefited from the aforementioned neutralisation of certain provisions based on the CEBS’s 2010 Guidelines. However, this basic approach is neither useful nor necessary as the provisions on the proportionality principle were included in the CRD IV with the specific purpose of taking account of the interests of smaller and less complex institutions. The exemptions provided for in the CEBS’s 2010 Guidelines can continue to be granted on this basis. The proportionality principle enshrined in the CRD IV allows certain exemptions to be applied also to smaller Bausparkassen, whose business model is governed by special laws and whose salary structures are generally based on collective agreements. There is therefore no need for an amendment to the CRD IV in order to achieve the outcome desired, not least, by the EBA.
Indeed, the proportionality principle is mentioned at various points in the CRD IV, with recital 66 expressly providing for possible non-application of individual provisions (neutralisation) in the interests of proportionality. The principle of proportionality enshrined in Article 92(2) requires that “when establishing and applying the total remuneration policies …” institutions comply with the principles set forth in Article 92 ff. “in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities.” The principle enshrined in Article 92(2) was specifically included in respect of the variable elements of remuneration governed by Article 94. On this basis, non-application of individual provisions of the CRD IV due to an institution’s relatively small size and significance or the low level of its variable remuneration in relative or absolute terms is entirely possible as it stands.
In the view of the EFBS, the Draft Guidelines call into question the validity of the proportionality principle in respect of the rules governing remuneration in the institutions. There is no need, practical or otherwise, for such a restrictive application of the CRD, in the opinion of the EFBS. On the contrary, the effort involved in implementing these provisions is quite disproportionate to the resulting benefits. The EFBS is therefore in favour of retaining the current interpretation of the proportionality principle.
In accordance with this approach, the provisions of Section 9 (“The identification process”), according to which all institutions should conduct annually a self-assessment in order to identify all staff whose professional activities have or may have a material impact on the institution’s risk profile (“identified staff”), should only apply to significant institutions.
Jonathan Pfenning