Central Bank of Ireland Policy Statement on CRD IV Variable Remuneration Rules
A policy statement issued by the Central Bank of Ireland (‘CBI’) on 31 January 2017 (the ‘Statement’) means that some small investment firms and credit institutions supervised directly by the CBI may no longer need to pay a proportion of variable remuneration in instruments or defer the payment of variable remuneration as required under Directive 2013/36 (‘CRD IV’).
CRD IV introduced a set of remuneration rules for credit institutions and investment firms. These rules included specific provisions governing the manner in which variable remuneration is to be structured.
Under CRD IV rules at least 50% of variable remuneration must be paid in instruments (i.e. shares or other non-cash instruments) linked to the performance of the credit institution or investment firm. In addition, between 40-60% of variable remuneration should be deferred over a period of three to five years and up to 100% of variable remuneration must be subject to clawback arrangements (linked to conduct and standards of fitness & probity).
Many smaller institutions relied on the ‘proportionality principle’ contained in Article 92(2) of CRD IV to exempt themselves from the requirement to comply with all of the CRD IV rules on variable remuneration. Article 92 (2) of CRD IV states 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”. Smaller credit institutions and investment firms attempted to rely on this proportionality principle so that they would not be required to defer payment of a proportion of the variable remuneration or pay a proportion in instruments rather than in cash.
The European Banking Authority (the ‘EBA’) adopted new guidelines in 2015 (the ‘2015 Guidelines’) which provided that from 1 January 2017 credit institutions and investment firms could no longer rely on the ‘proportionality principle’ to escape the variable remuneration provisions of CRD IV. In response to the 2015 Guidelines the CBI published the Statement requiring all credit institutions and investment firms to comply with the full set of CRD IV remuneration rules from 1 January 2017regardless of their size. The Statement does provide, however, that the assessment of compliance with the CRD IV remuneration rules will be guided by the European Commission's thresholds in its proposed amendments of CRD IV published on 23 November 2016 (see below).
New Exemptions for Smaller Institutions - The European Commission’s Proposal
In addition to adopting the 2015 Guidelines the EBA recommended to the European Commission that amending legislation (by away of a new proposed directive) should be adopted to exclude certain small, non-complex institutions from the more complex CRD IV requirements in relation to payment and deferral of variable remuneration. It also recommended that larger institutions should also be exempted from the payment and deferral requirements in cases where staff received low amounts of variable remuneration. The European Commission agreed with the recommendations of the EBA and on 23 November 2016 it published its proposal to amend the CRD IV in light of those recommendations.
The European Commission (by introducing a new Article 94 (3) into CRD IV) proposed that the pay-out and deferral requirements (known as ‘derogation thresholds’) of CRD IV should benefit from certain exemptions. The derogation thresholds concerned were:
- the requirement that at least 50% of variable remuneration be awarded in shares or non-cash instruments and subject to a retention policy;
- the requirement that at least 40% of variable remuneration be deferred for 3-5 years and to vest on a pro-rata basis; and
- the requirement to hold and retain discretionary pension benefits in certain instruments and for a certain period of time.
The European Commission proposed that exemptions from these requirements would be available in the following circumstances:
- Where an institution's assets are "on average equal to or less than €5 billion over the four-year period immediately preceding the current financial year"; or
- Where "staff member[s] whose annual variable remuneration does not exceed €50,000 and whose variable remuneration does not represent more than 25% of the staff member's annual total remuneration".
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 proposed amending legislation will not become law until late 2017 at the earliest and therefore a situation has arisen where the EBA's strict interpretation of the proportionality principle has meant all CRD IV remuneration rules must apply to all firms from 1 January 2017, notwithstanding that legislation amending the applicability of the pay-out and deferral arrangement rules is imminent. The fact however that the Statement provided that the assessment of compliance with the CRD IV remuneration rules will be guided by the European Commission's thresholds in its proposed amendments of CRD IV will ensure that credit institutions and investment firms capable of falling within the proposed derogation exemption thresholds and who are supervised directly by the CBI will be 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.
Unaffected Variable Remuneration Provisions of CRD IV
Credit institutions and investments firms must still comply with the clawback provision of CRD IV which provide that up to 100% of variable remuneration must be subject to clawback arrangements where (for example) an individual has participated in or has been responsible for conduct which resulted in significant losses to the investment firm or credit institution, or where the individual has failed to meet appropriate standards of fitness and probity.
The bonus cap introduced by CRD IV also continues to apply whereby a maximum ratio between the fixed and variable component of the total remuneration must still be set. The rules on bonus caps set the base ratio between fixed and variable remuneration at 1:1, such that an individual’s bonus could not exceed their fixed remuneration. Member states under CRD IV could allow this ratio to be increased to 1:2 with the approval of shareholders and Ireland has allowed for the possibility of such an increase.