The European Banking Authority (EBA) has agreed its final draft regulatory technical standards (RTS) on criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile.
These identified staff will be subject to provisions related, in particular, to the payment of variable remuneration.
The standards are part of the EBA’s work to enhance regulatory harmonisation in the banking sector in the European Union (EU).
The EBA draft standards look at remuneration packages for identified staff categories and aim to ensure that appropriate incentives for long-term risk taking are provided.
The EBA intends that this will ultimately contribute to supporting financial stability across the EU, because inappropriate incentives for management and employees, for instance, with disproportionate rewards on the upside and insufficient penalties on the downside, have often led to short-term oriented and excessively risky strategies.
As a general principle, staff will be identified as having a material impact on the institution’s risk profile if they meet one or more of the following criteria:
- Standard qualitative criteria: Related to the role and decision-making power of staff members (for example, the employee is a member of a management body, is a senior manager, or has the authority to commit significantly to credit risk exposures).
- Standard quantitative criteria: Related to the level of total gross remuneration in absolute or in relative terms. In this respect, staff should be identified if their total remuneration exceeds, in absolute terms, €500,000 (£421,164) per year, or they are included in the 0.3% of staff with the highest remuneration in the institution, or their remuneration is equal to, or greater, than the lowest total remuneration of senior management and other risk takers.
- Exclusion criteria: The draft standards allow, in justified cases, under additional conditions and subject to supervisory review, the exclusion of staff identified only according to standard quantitative criteria. In this respect, for staff with an awarded total remuneration of €500,000 (£421,164) or more a year, institutions will need to notify exclusions to the competent authority. For staff with a total awarded remuneration of €750,000 (631,746) per year or for staff included in the 0.3% of the highest earners, a prior approval of exclusions is required. For staff with a total remuneration of €1 million (£842,328,000) or more, competent authorities need to inform the EBA about such intended exclusions before the decision is made. Institutions will have to submit the notification or application and demonstrate that the excluded staff on the basis of the business unit they are working in, as well as of their duties and activities have indeed no material impact on the institution’s risk profile.
The draft standards will now be submitted to the European Commission for adoption.
They will come into force after their publication in the Official Journal of the European Union. The EBA will review the development of identification practices and the exclusion of staff in the course of 2015.
Jon Terry, partner at PricewaterhouseCoopers, said: “Overall, these are sensible changes to the rules. The EBA has given firms the chance to make the case for excluding people earning more than €500,000 (£421,164), who genuinely aren’t risk takers.
“This will be welcomed by the industry and should significantly reduce the number of additional staff deemed to be material risk takers.
“Although the changes will reduce the potential number of material risk takers, the biggest part of the problem will remain. Many of those who will be affected by the bonus cap earn more than €1 million (£842,328,000), in any case.
“Overall, we think it’s likely these rules will continue to capture high-earning traders. But there may be the opportunity to exclude people who don’t put the firm’s capital at risk, such as back-office staff, analysts or portfolio managers in banks’ asset management businesses.
“The compromises made by the EBA shouldn’t distract from the fact that this still creates an unequal playing field for EU firms operating in Asia, North America and elsewhere outside the EU.”