Financial Services Reward Update – CRD V and CRR II

On 7 June 2019, the amended Capital Requirements Directive (CRD V) and Capital Requirements Regulation (CRR II) were published in the Official Journal of the European Union.

The legislation will enter into force on 27 June 2019 and Member States will have until 28 December 2020 in which to amend their local CRD remuneration rules in order to reflect the new CRD V provisions. The changes to the remuneration disclosure provisions under CRR II will take effect in June 2021.

Which firms are impacted ?

Affected Firm

EU regulated banks, building societies and Investment firms*

* Investment firms which are not categorized as systemically important and exposed to the same types of risks as credit institutions will become subject to the new Investment Firm Directive and Regulation, which are expected to be published in the Official Journal in Q3 2019 and have an 18 months implementation period.

Key dates

Changes to remuneration rules Under CRD V:

Member States must update their rules by 28 December 2020 and apply these from 29 December 2020 and so first expected impact being performance year 2021.

Amendments to remuneration disclosure requirements under CRR II:

Apply from 29 June 2021.

Key changes

The changes being introduced under CRD V will require impacted firms to reassess their remuneration arrangements. In summary, the key changes are:

Proportionality

A lowering of the current threshold practiced on the place in France for the application of proportionality on an individual level, to a threshold of total individual variable remuneration of €50,000, which does not represent more than one-third of their total annual pay. As a result, many more Material Risk Takers (MRTs) are likely to become subject to the rules on deferral, payment in retained instruments and malus/clawback (subject to French regulators determining the French position on this.)

A lowering of the current French threshold for the application of proportionality on a firm-wide basis (subject to French regulators determining the French position on this)

Bonus cap and payout process rules

No disapplication of the bonus cap, either by smaller firms which rely on proportionality or in relation to lower-earning MRTs.

No disapplication of clawback by smaller firms or in relation to lower-earning MRTs.

The minimum deferral period will increase from “three to five years” to “four to five years”, impacting the minimum three year deferral currently applied under French rules.

MRT identification

New draft Regulatory Technical Standards (RTS) on Material Risk Taker (MRT) identification are expected to be published by the European Banking Authority (EBA) by 28 December 2019. The CRD V text suggests certain changes to the current quantitative tests for identification.

Remuneration disclosures

CRR II has been amended to require more granular detail in relation to certain areas of firms’ Pillar 3 remuneration disclosures.

We have set out more detail in relation to these changes below.

Key changes impacting all CRD firms

Individual de minimis threshold

The threshold for disapplying the rules on deferral, payment in instruments and discretionary pension benefits will be, from a French standpoint, considerably lowered.

To benefit from individual proportionality under CRD V, an individual’s annual variable remuneration must be no more than €50,000 and this must be no more than one-third of their total annual remuneration. A lower threshold may be set by local regulators, if they consider this to be appropriate in light of remuneration practices in their jurisdiction or the specific nature or responsibilities of particular employee populations.

This is likely to have a material impact for many French firms by increasing the number of MRTs subject to the deferral and payment in instruments requirements.

In addition, CRD V does not provide for the disapplication of malus and clawback in relation to lower-earning MRTs. While malus will be applicable only where deferral is applied, clawback will need to be applied to all de minimis MRTs for the first time.

Deferral

The minimum deferral period to be applied to MRTs will be increased from three to four years, directly impacting future awards to those MRTs who are currently subject to three year deferral under the UK rules. It remains to be seen whether the French deferral rules applicable to Risk Managers and Senior Management Functions will be reviewed further to this amendment.

The minimum 40% or 60% proportion of variable pay to be deferred remains unchanged.

In addition, the requirement under the EBA Guidelines on sound remuneration policies under CRD IV (EBA Guidelines) that members of the management body or senior management of ‘significant firms’ should be subject to a minimum five year deferral period is hard-wired into CRD V.

Payment in instruments

While the position taken by different local regulators on this point has varied in practice, CRD V formally removes the restriction on listed firms using phantom awards to satisfy the payment in instruments requirement.

The requirement to award at least 50% of variable remuneration to MRTs in retained instruments remains unchanged.

MRT identification

CRD V sets out the core parameters for identifying individuals as MRTs of the firm and suggests that there may be future changes to the quantitative tests applied for identifying MRTs.

Further detail will be set out in the new draft RTS on MRT identification (to be published by the EBA by 28 December 2019), but we note that there is no reference in the CRD V text to the current quantitative MRT test of the individual receiving total remuneration in the top 0.3% of staff.

In addition, CRD V states that firms will need to identify staff members “entitled to significant remuneration” in the preceding financial year, provided that their remuneration is “equal to or greater than €500,000 and equal to or greater than the average remuneration awarded to members of the institution’s management body and senior management”, and they perform professional activities within a material business unit which have a “significant impact” on the relevant business unit’s risk profile. It is unclear whether the reference to the €500,000 threshold and the individual earning the same as senior management is intended to be applied as a combined “and” test, rather than the current “or” test.

The CRD V text confirms that all members of the management body and senior management of a firm will continue to be identified, as will individuals with managerial responsibility over the firm’s control functions or material business units.

The new RTS is expected to cover the criteria for determining what constitutes “managerial responsibility” and “control functions”, as well as a “material business unit” and “significant impact” on a business unit’s risk profile. The new RTS will also set out the EBA’s updated position on “other categories of staff not expressly referred to” in CRD V, whose professional activities may nevertheless have an impact on the firm’s risk profile as material as that of the categories of staff specifically referred to in CRD V.

Application of sectoral principles within groups

CRD V also contains provisions relating to the application of the CRD remuneration requirements within groups which include subsidiaries which are subject to other specific EU remuneration requirements (e.g. AIFMD, UCITS V or, once this takes effect, the new prudential regime for investment firms).

These subsidiaries will be able to apply the specific sectoral remuneration principles applicable to them. However, in order to avoid circumvention of the CRD remuneration rules, CRD V requires Member States to ensure that the CRD remuneration requirements are applied to individual staff members of such subsidiaries which are asset management companies or provide investment services, where those individuals have a “direct material impact” on the risk profile or business of CRD firms within the group. CRD V also allows Member States to require firms to apply the CRD remuneration requirements more broadly within the group.

Key changes impacting Level 3 firms

Under the new CRD V rules, it will not be possible for smaller firms which are subject to CRD to disapply the bonus cap.

The asset threshold for smaller CRD firms to disapply the rules on deferral, payment in instruments and discretionary pension benefits is also being lowered. The default threshold under CRD V is where a firm, which is not a “large institution” (as defined under CRR II), has gross assets of less than or equal to €5 billion over the four preceding years – a threshold which will be capable of amendment by local regulators to €15 billion (or lower) in certain circumstances. For proportionality purposes, the French legislator has already considered this risked-based approach under the CRD IV rules, providing notably for exemptions on an individual and consolidated basis under certain conditions for specific entities, notably with a balance sheet threshold of €10 billion, insurance companies and asset management companies.

It remains to be seen, however, exactly how the asset test will be expected to apply in a group context.

Other changes to note

CRD V introduces a specific requirement for firms to have a “gender neutral” remuneration policy. While not a new concept in itself (it is defined as a remuneration policy based on equal pay for male and female workers for equal work or work of equal value), the EBA is mandated under CRD V to issue guidelines on what constitutes gender neutral policies.

Furthermore, local regulators will collect information on the gender pay gap from firms to provide to the EBA, which will issue a report on the application of gender neutral policies two years after the publication of the new guidelines.

CRR II incorporates more granular changes in relation to the disclosure of remuneration (in part reflecting the remuneration disclosure provisions in the EBA Guidelines and in the Basel Committee on Banking Supervision report from March 2017 relating to Pillar 3 disclosure requirements). When disclosing quantitative information (split by senior management and MRTs), firms must include:

  • A description of the fixed components of remuneration awarded for the financial year
  • Information on what amounts and forms of variable remuneration awarded (i.e., cash and shares/other instruments) have been paid upfront and deferred
  • Information on previously awarded severance payments which were paid out during the financial year
  • In relation to severance payments made during the financial year, the firm must distinguish between the amount paid upfront and the amount deferred
  • A firm must also disclose information on whether it has relied on firm-level or individual-level proportionality under CRD V

With the emphasis on the granularity of disclosures and the need to disclose the firm’s reliance on proportionality, firms will need to consider their methodology to meet the amended disclosure requirements under CRR II.

  • A link to the finale CRD V and CRR II text can be found here.
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Alexis Fillinger

Alexis Fillinger has more than 11 years of practicing. He advises both companies and individuals on personal tax matters, in international context He is specialized in the structuring of investment […]

Christina Melady

Christina Melady, Partner, has over 23 years’ experience practicing tax law in France and advises both companies and managers on personal tax matters. Christina created the specialized practice in France […]

Nicolas Meurant

Nicolas Meurant, Partner, has over 15 years’ experience providing advice to corporations and individuals in individual tax and Global equity area, in the structuring of shareholding schemes, as well as […]