Small investment firms and credit institutions supervised directly by the Central Bank of Ireland (“CBI”) have been given a slight reprieve from complying with the more complex remuneration rules concerning pay-out and deferral arrangements in the Capital Requirements Directive (“CRD IV”) following the publication of a new Policy Statement by the CBI. However, there is no exemption from the other important provisions of the remuneration regime under CRD IV, including malus (i.e. performance adjustment) and clawback provisions, or from the requirement that variable remuneration be capped by a ratio relative to fixed remuneration (i.e. the bonus cap), all of which will continue to apply to all investment firms and credit institutions regardless of their size.
In the aftermath of the financial crisis the CRD IV introduced a set of rules regarding the remuneration policies and practices of credit institutions and investment firms. In particular, variable remuneration for staff members was to be paid in instruments issued by an institution (e.g. shares or other non-cash instruments), deferred for a set period of time and subject to malus and clawback provisions. However, many smaller institutions relied on the “proportionality principle” in Article 92(2) of CRD IV, which stated that firms should comply with the remuneration rules in CRD IV “to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities”, to effectively exempt themselves from having to comply with all of the CRD IV rules on variable remuneration.
In 2015, the European Banking Authority (“EBA”) adopted new Guidelines which stated that there was no room for wholesale exceptions or exemptions from the CRD provisions on remuneration through reliance on the proportionality principle. These revised guidelines took effect on 1 January 2017 and have required all credit institutions and investment firms to comply with the full set of CRD IV remuneration rules from that date regardless of their size.
New exemptions for smaller institutions
However, the EBA also issued an Opinion in 2015 recommending to the European Commission that amending legislation be adopted to exclude certain small, non-complex institutions from the more complex CRD IV requirements in relation to pay-out and deferral of variable remuneration. Larger institutions will also be exempted from the pay-out and deferral requirements in cases where staff receive low amounts of variable remuneration. The Commission agreed with these recommendations but only published its proposal to amend CRD IV to this effect on 23 November 2016. As this draft amending legislation will not become law until later this year at the earliest, a situation has arisen where the EBA’s strict interpretation of the proportionality principle has meant all CRD IV remuneration rules have applied to all firms since 1 January 2017, despite the fact that legislation amending the applicability of the pay-out and deferral arrangement rules is imminent.
The Commission has proposed the following exemptions from the following pay-out and deferral requirements of CRD IV:
- the requirement that at least 50% of variable remuneration be awarded in shares or non-cash instruments and subject to a retention policy (contained in point (l) of Article 94(1) CRD IV);
- the requirement that at least 40% of variable remuneration be deferred for 3-5 years and to vest on a pro-rata basis (contained in point (m) of Article 94(1) CRD IV); and
- the requirement to hold and retain discretionary pension benefits in certain instruments and for a certain period of time (contained in the second sub-paragraph in point (o) of Article 94(1) CRD IV).
The exemptions from pay-out and deferral requirements will be available in the following situations (known as “derogation thresholds“):
- Where an institution’s assets are “on average equal to or less than EUR 5 billion over the four-year period immediately preceding the current financial year”; or
- Where “staff member whose annual variable remuneration does not exceed EUR 50,000 and does not represent more than one fourth of the staff member’s annual total remuneration”.
It must be noted that competent authorities, such as the CBI, will retain a discretion to bring certain firms and categories of employees within the scope of CRD IV, notwithstanding that they fall within the terms of the proposed derogation thresholds above.
The Policy Statement published by the Central Bank on 31 January 2017 states that assessment of compliance with the CRD IV remuneration rules “will be guided by… the European Commission’s thresholds in… its proposal of amendments to CRD IV published on 23 November 2016”. This will ensure that credit institutions and investment firms capable of falling within the proposed derogation thresholds and supervised directly by the CBI will remain exempt from having to comply with the more onerous pay-out and deferral rules in CRD IV pending the finalisation of the proposed legislative amendments. This is a welcome clarification of the regulatory position on this matter.
Contributed by Ian O’Mara