23 March 2018
The European Banking Authority (EBA) has published an opinion on the application of the Capital Requirements Directive IV (CRD IV), the principles of remuneration policies of credit institutions and investment firms and the use of special allowances.
The opinion and annexed report is a response to an investigation into the nature of role-based allowances and compliance with the CRD IV requirements, carried out by the EBA as part of its market monitoring tasks and in response to a request made by the European Commission (EC) earlier this year.
In the UK, the FCA has so far accepted the use of special allowances as part of an institution’s remuneration structures. However, the EC’s vice president, Michel Barnier, recently expressed strong concerns in a letter to the EBA regarding the possible circumvention of the legal framework for variable remuneration under CRD IV through the use of these special allowances.
The EBA collected information from member state regulators, to analyse the types and use of special allowances (sometimes referred to as role-based pay, staff allowances, adjustable role allowances and fixed pay allowances) and have identified that allowances of this kind, regarded so far by institutions, as fixed remuneration, have been introduced in particular where the bonus cap would apply, i.e. the performance-related variable remuneration would otherwise exceed 100% of the fixed remuneration (or 200% with shareholders’ approval).
Characteristics of role-based allowances
In its opinion, the EBA sets out that, whilst special allowances are not related explicitly to performance, some common characteristics include that they:
- are not part of the basic salary and are not pensionable
- are initially granted for a limited period of time
- can be reduced, suspended or cancelled by institutions on a fully discretionary basis, or are based on other contractual conditions which do not form part of routine employment packages
The opinion requests that member state regulators be aware of the use of role-based allowances that have the characteristics identified above and to take ‘all appropriate supervisory actions’ to ensure that institutions’ remuneration practices on special allowances comply with the CRD IV remuneration provisions by the 31 December 2014.
The EBA’s opinion is that, to qualify as fixed remuneration (and thus comply with the CRD IV requirements), the necessary characteristics of role-based allowances are that they should be:
- permanent (i.e maintained over time and tied to the specific role and organisational responsibilities for which they are granted)
- predetermined, in terms of condition and amount and should not provide incentives to take risks
- non-discretionary, non-revocable (without prejudice to national law)
- transparent to staff
The opinion makes clear that regulators aware of the use of role-based allowances not holding these characteristics, are expected to take all appropriate supervisory actions to ensure that:
- institutions’ remuneration policies are updated to ensure that these allowances are correctly classified as variable remuneration
- payment of these allowances do not cause institutions to contravene the bonus cap and other requirements laid down in the CRD IV
Firms in the UK should therefore consider their current use of special allowances between now and January, to ensure they do not contravene the CRD IV requirements.