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Commission changes CRD IV to ease remuneration burden on smaller banks

The European Commission aims to reduce the administrative burden of remuneration rules on smaller, less complex banks and investment firms subject to the Capital Requirements Directive IV (CRD IV) as part of a suite of amendments to the CRD IV and other EU rules.24 Nov 2016

Rules on deferral of remuneration and on remuneration using instruments, such as shares, will be changed, the Commission said.

Remuneration expert Graeme Standen of Pinsent Masons, the law firm behind said: "As we hoped, the Commission has accepted the European Banking Authority (EBA)'s proposals to ensure that smaller firms and less highly paid 'identified staff' will generally continue to be able to escape certain detailed rules about bonus pay on proportionality grounds."

The rules currently require a proportion of bonus pay to take the form of shares or similar instruments, and be deferred for at least three to five years. All discretionary pension benefits for leavers who are not yet retired must also be held by the employer in that form for at least five years.

Smaller, less complex firms will no longer be subject to these rules unless national regulators insist that particular firms or staff members should be covered by the rules.

Listed firms will be also able to make use of share-linked instruments rather than only shares to comply with the requirement to deliver a proportion of bonus pay in the 'form of instruments'.

Standen said: "The flip side of the proportionality amendments is that it seems that the general remuneration proportionality allowance in the amended Directive will now have to be interpreted as the EBA and Commission believed it should be already. That interpretation differed from the way in which proportionality had been previously applied under CRD III, and at first under CRD IV, and also from the continuing views of some firms, national regulators and advisers who thought that the unamended CRD IV proportionality provisions authorised the complete derogation from some detailed rules by some smaller and / or less complex firms."

"Also, as expected, the amendments will not allow any firm or identified staff to escape the CRD IV bonus cap on proportionality grounds," Standen said.

The 'bonus cap' applies to senior staff, and is set at 100% of the individual’s salary or up to 200% where member states permit and shareholders agree. The UK's Prudential Regulation Authority (PRA) has consistently objected to the introduction of a bonus cap as counter-productive, arguing that it will drive up fixed pay and therefore banks' fixed costs.

Standen said: "The PRA has previously stated emphatically that it would not comply with the EBA and Commission's interpretation of the original CRD IV provisions, and intended to continue to permit derogations from the bonus cap on proportionality grounds in appropriate cases. That amounted only to defiance by a national regulator of revised EBA guidelines that were mandated by CRD IV, rather than a breach of CRD IV itself, and is arguably permitted by the original wording in CRD IV."

"However, the amended text appears to give the PRA far less scope to continue to allow any proportionality derogations from the bonus cap, and could have the result that all UK firms and identified staff must comply with the bonus cap at some point in the future, depending on the date and terms on which the UK leaves the EU," Standen said.

"Firms and advisers will be keen to hear from the PRA what position it will take on compliance with the amended Directive, once it comes into force and the UK has transposed it into domestic law," he said.

"As the original CRD III remuneration rules, including similar allowances for proportional application, were the ancestors of remuneration rules in other Directives applicable to certain types of financial sector firm, affected firms and advisers will also be keen to learn whether the Commission also plans to amend those rules, and, in the meantime, how relevant EU regulators might update their guidance on proportionality issues under those Directives," Standen said.

"New EBA guidelines on sound remuneration policies under CRD IV are due to come into force on 1 January 2017, and are based on proportionality continuing to work broadly as these proposed amendments suggest. While the Commission's proposals have not yet been considered by the Council of Ministers and European Parliament, and strictly CRD IV remains in force in its unamended form, the publication of the proposals at least provides affected firms and regulators with greater clarity and confidence about how the CRD IV remuneration rules will be applied within the UK from that date," he said.

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