Bankers‘ bonuses– amended rules finally agreed at EU level

Back in November 2016, the Commission released a number of amendments to CRD IV aimed at clarifying the exact scope of some of the remuneration provisions as the European Banking Authority’s (EBA) restrictive views raised some concerns among stakeholders.

It took over two years for the EU institutions to agree on these amendments, partly because they were then included in the so-called “banking package”: a much more ambitious and controversial set of measures aimed at strengthening banks’ resilience and reducing risk. An agreement was finally reached on 4 December 2018 and it took a few more discussions and weeks for the final texts to be released.

The agreed changes to bankers‘ bonuses‘ rules, as set out in the text published on 14 February 2019 (so-called CRD V, updating CRD IV) are as follows:

Gender neutral policies

CRD V introduces a requirement for remuneration policies to be gender neutral as part of the EU’s push for equal pay for equal work. The EBA is tasked with the production of guidelines.

Proportionality

The proportionality principle, which is intended to reduce the administrative burden of some of the remuneration rules for smaller and less complex institutions and for staff with low variable remuneration is confirmed and clarified in line with the Commission’s proposal from 2016 and with the conclusions of the EBA. Some of the remuneration rules will not apply to smaller institutions - defined as institutions the value of the assets of which is on average and on an individual basis equal to or less than EUR 5bn over the four-year period immediately preceding the current financial year - or to staff members whose annual variable remuneration does not exceed EUR 50,000 and does not represent more than one third (against one fourth in the Commission’s proposal) of the staff member's annual total remuneration. Member states have the possibility to increase the EUR 5bn threshold to EUR provided certain (specified) criteria are met. The rules on the use of non-cash instruments (for both remuneration and pension payments) and deferrals will not apply in these cases, whereas the so-called bonus cap (the maximum ratio between fixed and variable remuneration) will continue to apply to all material risk takers, irrespective of the size of the institution they work for or the level of the variable remuneration. The new rules will clash with guidance by some of the local regulators across Europe who had adopted higher thresholds; although the Brexit may help the UK regulator to stick to its existing guidance.

Use of share-linked instruments

The agreed text confirms that both listed and non-listed institutions will be able to use share-linked instruments in the remuneration mix (whereas a strict interpretation of CRD IV had led the EBA to consider that listed institutions could only use shares and no share-linked instruments).

Consolidation 

There was a conflict situation for subsidiaries which are not institutions and therefore not subject to CRD IV on an individual basis but caught as part of a group while at the same time subject to other remuneration requirements pursuant to the relevant sector-specific legislation (eg AIFMD). The agreed text will make the sector-specific rules prevail. As a rule, CRD V provisions will not apply on a consolidated basis to such subsidiaries. Nevertheless, some individuals working for these subsidiaries may still be in scope for CRD V (eg those performing specific services, such as asset management or portfolio management or professional activities which trigger their qualification as “material risk taker” at the level of the banking group as part of a delegation/outsourcing arrangement concluded between the subsidiary employing the staff and another institutions in the same group).

Other changes

Other changes include a list of functions/staff which should be considered as material risk takers and a change in the deferral period (not less than 4 to 5 years - instead of 3 to 5 - and not less than 5 for members of management bodies and senior management).

Next steps 

Formal adoption by the European Parliament is scheduled to take place mid-April. The publication in the official journal will follow. Member states will then have 18 months for transposition. This probably means that the new provisions will be effective from 1 Jan 2021. New EBA guidelines are expected to be published in the meantime, as the agreed text asks the regulator to adopt such guidance with a view to facilitate the implementation of the new provision on proportionality. Until then, the CRD IV provisions remain in force as well as the 2015 EBA guidelines which entered into force in 2017.