On 9 June 2021, the European Commission regulation setting out the Regulatory Technical Standards (RTS) on the criteria for identifying material risk takers (MRTs) was published in the Official Journal of the European Union. It came into force on 14 June 2021. 

The RTS builds on the draft RTS published in June 2020 (the June 2020 Draft), with a few notable differences, which we have highlighted below.  We have also set out a summary of the RTS, by way of reminder.

Introduction

Article 94(2) CRD IV was amended by CRD V ((EU) 2019/878) to require the European Banking Authority (EBA) to develop RTS specifying the criteria for identifying staff members whose professional activities have a material impact on an institution's risk profile (that is, MRTs).

In the EU, the published RTS came into force on 14 June 2021. For credit institutions, the RTS repealed the existing (CRD IV) RTS on the same date. For investment firms, the CRD IV RTS was repealed on 26 June 2021, in line with the coming into force of the Investment Firms Directive and Regulation. The RTS states that investments firms should not bear “unjustified costs” when complying with the RTS. There is no such qualifier for credit institutions.

In the UK, the sections of the FCA handbook and PRA rulebook implementing CRD V’s remuneration rules provide that firms should identify MRTs by reference to the June 2020 Draft. These references to the June 2020 Draft will remain in place in the UK unless the UK regulators update the handbook and rulebook to reflect the new RTS. We expect that they may look to refresh the UK remuneration codes, in order to avoid inconsistencies as between the UK and EU member state approach to identification of MRTs. Pending any update to the UK remuneration codes, it will be important to note the differences between the June 2020 Draft and the final RTS. These are summarised below.

Summary of the RTS

The key provisions of the RTS are as follows:

  • The criteria for determining whether the professional activities of staff members have a significant impact on the relevant material business unit’s risk profile (Article 94(2)(a) and (b) CRD V and Article 3 RTS). These criteria link back to the provisions of CRD V and set out how firms should go about determining whether staff are working in roles which may have a significant impact on a material business unit. Key areas for firms to evaluate include the risk profile, risk limits, performance limits and performance indicators of the material business unit and the duties and authorities of the staff member or categories of staff.

  • Qualitative and quantitative criteria for determining whether staff members have a material impact on an institution's risk profile:

    • Qualitative criteria (Article 92(3) CRD V and Articles 4 and 5 RTS):
      • Staff with “managerial responsibility” are defined as staff who are head of a business unit or control function and directly report to the board or senior management.
      • The RTS provides a list of functions in which staff with managerial responsibility are required to be identified as MRTs, including: legal affairs; accounting policies and procedures; finance including taxation and budgeting; economic analysis; money laundering and terrorist financing; human resources; development of implementing the remuneration policy; IT/ information security; outsourcing arrangements where the role relates to the safeguarding of assets or client money or the execution of client orders or trading activities. This is a more expansive list than that outlined in the draft RTS for investment firms published under the Investment Firms Directive ((EU) 2019/2034)).
    • Staff members or categories of staff whose professional activities have an impact on the institution’s risk profile that is comparably as material as senior management (see further below).

    • Quantitative criteria (Article 92(3) CRD V and Article 6 RTS):
      • Article 92(3) CRD V provides that staff members will be MRTs where:
        • They are performing professional activities within a material business unit and the activity is of the kind that has as a significant impact on the business unit’s risk profile; and
        • They earn equal to or more than: (a) EUR 500,000 (£440,000 in the UK); and (b) the average pay for the firm’s board/ management body (including non-executive directors) and senior management, unless such staff can be excluded.
      • There is a presumption under Article 6 RTS that staff members earning in the previous financial year (a) total remuneration equal to or greater than EUR 750,000; or (b) who are within the highest paid 0.3 per cent of staff (for institutions with over 1,000 staff) will be MRTs, unless they can be excluded under the mechanisms set out in Article 6(2)-(4) RTS.
      • Firms will need to establish an internal policy governing their approach to exclusions and should also take account of the potential timing impact of obtaining prior approval for exclusions from relevant competent authorities.

  • Calculation of the average total remuneration for staff members (Recital (8) and Article 7 RTS): firms can apply the quantitative thresholds using fixed pay for the prior year and either (i) variable pay paid in that prior year (ie awarded for the year before that prior year); or (ii) variable pay awarded for the prior year and so paid in the current year. The RTS states that the latter approach may be preferable, provided that the data is available. Firms are required to choose and commit to their chosen approach in their remuneration policy.

Changes since the EBA June 2020 Draft

  • there are changes to the numbering. This is only an administrative change, but client documentation referencing the RTS may require updating;
  • there are quite a few changes to the detailed drafting. On the whole, these changes are not substantive, but they should still be reviewed; and
  • there is a new Article (Article 4 RTS). This refers to the identification of staff members or categories of staff whose professional activities have an impact on the institution’s risk profile which is comparably as material as that of staff members identified under Articles 92(3) CRD V where those staff meet any of the qualitative or quantitative criteria already set out in the RTS. This Article is clearly designed as a catch-all provision to ensure that staff working in roles which are comparably material to MRTs are classified as MRTs. We are not clear what this addition achieves practice, since our expectation is that those staff members will meet either the quantitative or qualitative criteria set out in the RTS and as such would already be classified as MRTs. But the intention of this Article is clear and it serves as a useful extra sense-check for firms confirming their MRT populations under CRD V.

What’s next?

We are expecting the EBA to publish the final version of its guidelines on sound remuneration policies shortly (the Guidelines). The Guidelines take into account the amendments introduced by CRD V in relation to institutions’ sound remuneration policies and in particular the requirement that those remuneration policies should be gender neutral.