New remuneration rules for banks and investment firms
New remuneration rules for banks and investment firms
New regulatory technical standards (RTS) on remuneration are now in place under the Capital Requirements Directive from 14 June 2021, while certain investment firms will remain subject to the previous remuneration rules until 26 June 2021. In this article, our remuneration specialists take a look at the key provisions.
These RTS define managerial responsibility as a situation in which any of the following criteria apply:
Heading a business unit or a control function and is directly accountable to the management body or a member of the management body or to senior management.
The staff member heads a listed function. The listed functions are those with managerial responsibility for legal affairs, soundness of accounting policies and procedures, finance, economic analysis, preventing money laundering or terrorist financing, human resources, implementing or developing remuneration policy, information technology, information security, managing critical or important outsourcing functions.
In a large institution, the staff member heads a subordinated business unity or control function and reports to a staff member referred to in (a).
Control function is defined as a function independent from the business units that it controls, which has a responsibility to provide objective assessment of risks, reviews or reporting, including, but not limited to, the risk management function, the compliance function and the internal audit function.
A definition of material business unit is provided as a business unit, meaning any separate organisational or legal entities, business lines or geographical locations, which meets either of the following criteria:
a) it is a business unit with allocated internal capital of at least 2% of the internal capital of the institution or is otherwise seen to have a material impact on the institution’s internal capital
b) it is a core business line (meaning a business line and associated services that represent material sources of revenue, profit or franchise value for an institution or the wider group.
Credit institutions are required to set out within their remuneration policies, criteria to determine whether the professional activities of staff have a significant impact on the material business unit's risk profile by taking in to account:
The risk profile of the material business unit
The distribution of internal capital to cover certain risks
The risk limits of the material business unit
The risk and performance indicators used to identify, manage and monitor risks of the material business unit
The relevant performance criteria set by the bank
The duties and authorities of staff members or categories of staff
The RTS specify that the following staff are deemed to have a material impact on an institution's risk profile if one or more of the qualitative criteria are met, these are having managerial responsibility for:
a) legal affairs
b) the soundness of accounting policies and procedures
c) finance, including taxation and budgeting
d) performing economic analysis
e) prevention of money laundering and terrorist financing
f) human resources
g) development or implementation of the remuneration policy
h) information technology
i) information security
j) managing outsourcing arrangements of critical or important functions
Staff members with managerial responsibilities for the management of credit and counterparty risk, residual risk, concentration risk, securitisation risk, market risk, interest risk, operational risk, liquidity risk and risk of excessive leverage or is a voting member of a committee that manages same are also deemed to have a material impact.
In addition, a staff member has a material impact if she or he heads a group of staff who have individual authorities to commit the institution to transactions at certain prescribed levels or if the staff member has the authority to decide to approve or veto new products or is a voting member of a committee that has authority to take such decisions.
Members of staff shall be deemed to have an impact on an institution’s risk profile where one or more of the following quantitative criteria are met:
The staff member has been awarded total remuneration of €750,000 or more. Such a staff member may be exempt, with the approval of the National Competent Authority.
If the institution has more than 1,000 members of staff, if the staff member is within the 0.3% of staff, rounded to the next higher integral figure, who have been awarded the highest total remuneration in or for the preceding financial year within the institution on an individual basis.
These RTS update previous rules implemented under the Fourth Capital Requirements Directive and practitioners will be familiar with many of the key concepts. Firms are now specifically required to assess the qualitative and quantitative criteria against the institution's risk profile.
The qualitative criteria are expanded to include staff members with responsibility for the soundness of accounting policies and procedures, preventing money laundering and terrorist financing, information security and managing critical or important outsourcing arrangements. Other staff members may fall out of scope if they are not voting members of certain committees.
Firms will be conscious to begin their review of the remuneration policies and practices ahead of the next remuneration cycle, for more information please contact Keavy Ryan, Partner, Corporate and M&A Partner, Patrick Brandt, Financial Regulation Partner and Sinéad Prunty, Financial Regulation Knowledge Lawyer.