CEBS issues guidelines on banking remuneration

FINANCIAL SERVICES

CEBS issues guidelines on banking remuneration

The Committee of European Banking Supervisors has issued draft guidelines (CP42) on the interpretation of the banking remuneration provisions of the recently amended Capital Requirements Directive (CRD III).

CRD III introduced a range of remuneration-related provisions for financial services institutions. These will be implemented in the UK through an updated FSA Remuneration Code, a draft of which was issued at the end of July and will be finalised next month. The guidance clarifies some important areas of interpretation in CRD III, and will have a direct impact on the delivery of 2010 remuneration for the 26 large UK banks, building societies and broker dealers deemed to have the most systemic impact on the economy.




Summary of key elements of CEBS guidelines

The key areas of the 84-page CP42 document are as follows:

  • Remuneration provisions will apply to certain senior staff and "risk takers" across the worldwide operations of European head-quartered organisations.

  • This will include all employees earning over an absolute amount of remuneration, with local regulators setting the amount.

  • For the highest earning individuals, at most 20% of variable pay can be paid as cash, with the remainder either deferred or to be held in securities for a retention period.

  • Deferred compensation must be capable of downwards (but not upwards) performance adjustment.

  • Even after the deferral period, deferred compensation should be held in shares or other securities for a subsequent “retention period”.

  • Firms must set a cap on variable remuneration as a multiple of base salary, although no specific guidance on the percentage to apply.

  • The remuneration provisions will be applied proportionately based on the nature of the organisation and the role of individuals within organisations.

Source: PwC analysis of CP42 by Jon Terry, reward partner.



High-level Principles for Remuneration Policies

The Committee of European Banking Supervisors (CEBS) was formed in 2004 to advise the European Commission on regulation and co-ordinate the implementation of rules across Europe. It is one of three so-called “level-three” committees bringing together national supervisors from different parts of the financial services sector.

CEBS had already published a set of High-level Principles for Remuneration Policies (PDF) on 20 April 2009 aimed at “assisting in remedying unsound remuneration policies”. These principles also built on the remuneration work carried out by other bodies, such as the Financial Stability Board and the European Commission.

Those guidelines placed special emphasis on senior employees and other risk-takers and risk-managers, but nevertheless required firms to adopt a remuneration policy that covers all levels of the organisation and all categories of employees. The key elements included clear governance of remuneration that sits with the firm’s managing body, performance measurement that combines risk-adjusted financial metrics with non-financial metrics, deferral of bonuses and clawback.

The CEBS Principles were aimed at member states’ national banking supervisory bodies and at individual banks within their jurisdictions.

An extensive implementation study regarding the national implementation of the high-level principles was carried out by CEBS and served as an input to the current CP42 guidelines, issued 8 October 2010.

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Capital Requirements Directive (CRD)

In July 2009, the European Commission moved to incorporate its recommendations on remuneration policy into European law, through the proposed amendment to the Capital Requirements Directive (CRD).

Under the revised CRD III, as agreed by the European Parliament on 7 July 2010, CEBS is required to “elaborate and issue guidelines on sound remuneration policies in the financial sector in order to facilitate the compliance of the remuneration principles included in the amended Annex V of the CRD”.

Article 22 of the revised CRD lays down the fundamental principle whereby banks are required to ensure that their remuneration polices and practices are “consistent with their organisational structure and promote sound and effective risk management”.

The remuneration requirements included in the CRD are divided into three blocks:

  • Governance (Annex V)

  • Risk alignment (Annex V)

  • Transparency (Annex XII).

Your views

CEBS has highlighted a number of areas in CP42 where it is particularly keen to receive comments. These include:

  • The length of “retention periods” for bonus payments (paragraph 125). CEBS defines retention periods as follows: “Period of time during which variable remuneration that has been already vested and paid out in the form of instruments cannot be sold. The retention period is independent from the deferral period. This means that, in order to meet the requirement of a minimum deferral period of three to five years, the retention period counts for nothing. The retention period can last for a shorter or longer period than the deferral period applied to the instruments that are not paid upfront.”

  • The minimum portion of bonuses to be paid as equity-linked instruments and their distribution (paragraph 130). CEBS understands that it is the EU legislators’ intention that the 50% minimum threshold applies equally to the non-deferred and the deferred parts.

Consultation

Public consultation on CP42 runs until 8 November 2010. Comments received will be published on the CEBS web site unless respondents request otherwise. Please send your comments to email: CP42@c-ebs.org.

The consultation is open to all interested parties, including supervised institutions and other market participants. A public hearing will take place in London on 29 October 2010 in order to allow all interested parties to present their comments.

Want to know more?

Title: Consultation Paper on Guidelines on Remuneration Policies and Practices (CP42), Committee of European Banking Supervisors (CEBS), 8 October 2010.

Availability: You can download the 84-page document in PDF format from the CEBS web site at www.c-ebs.org/Publications/Consultation-Papers/All-consultations/CP41-CP50/CP42.aspx.

The Committee of European Banking Supervisors (CEBS) is composed of high level representatives from the banking supervisory authorities and central banks of the European Union. Its role is to:

  • “Advise the Commission, either at the Commission's request, within a time limit which the Commission may lay down according to the urgency of the matter, or on the Committee's own initiative, in particular as regards the preparation of draft implementing measures in the field of banking activities.”

  • “Contribute to the consistent implementation of Community Directives and to the convergence of Member States' supervisory practices throughout the Community.”

  • “Enhance supervisory co-operation, including the exchange of information.”

For more information visit www.c-ebs.org.