Further to our 28 September Client Advisory, Alternative Investment Firms Should Prepare for Restrictions on Remuneration, the Committee of European Banking Supervisors (CEBS) has announced that it will now publish final form Guidelines on Remuneration Policies and Practices on or around 11 – 12 December 2010, somewhat later than expected. The delay at the CEBS level has caused the UK Financial Services Authority (FSA) to announce the postponement of its own revised remuneration code (the Code), as in part implements the CEBS guidelines. Despite the delay, the FSA still intends to apply the Code to investment firms from 1 January 2011. This effectively compresses the implementation period for firms to no more than three weeks, including the Christmas/New Year break. To assist with this, the FSA hopes to be able to provide, on a slightly earlier basis, more information on the crucial question of proportionality.
To recap, in July 2010 the European Parliament approved the package of amendments to the EU’s Capital Requirements Directive (CRD) known as ‘CRD3’. CRD3 includes a variety of remuneration restrictions and extends them beyond the banking industry to some 2,500 UK firms presently subject to CRD. The restrictions are intended to align a firm’s remuneration policies with its risk profile.
CEBS is empowered under CRD3 to issue guidelines on sound remuneration policies in the financial sector in order to facilitate compliance with the remuneration principles in the CRD. On 8 October 2010, CEBS published draft guidelines for consultation. The Guidelines address high-level remuneration policies and the day-to-day practices of remuneration decisions and procedures through which these policies are implemented.
CEBS has stated that “proportionality is key” in applying both the general as well as the specific requirements of CRD3. The CEBS approach, if retained, is likely to inform the FSA’s own implementation of the Code, although confirmation of this will have to await publication of the Code in December.
CEBS’s approach is to permit the disapplication (or “neutralisation”), where appropriate, of a number of key principles which would have caused problems for asset managers, and the ability for firms and regulators to apply the remaining principles proportionately. The principles subject to neutralisation include:
A firm “should be able to explain” its decision to completely neutralise any given principle.
CEBS recognises that while most of the rules will apply on a firmwide basis, others (mainly in the area of risk alignment) will apply only to “Identified Staff” (essentially, those with a material impact on the firm’s risk profile). In respect of the firmwide provisions, firms will be expected to apply proportionality on the basis of their size and internal organisation, and the nature, scope and complexity of their activities when looked at as a combination. Size alone, for example, would not be a relevant factor.
The Guidelines indicate that proportionality can also lead to the remuneration requirements being differentially applied to particular Identified Staff based on, for example, their degree of seniority and/or the size of the obligations into which they may enter on behalf of the firm.
CRD3 requires firms to disclose to the public “detailed information” regarding their remuneration policies and practices for Identified Staff. The Guidelines recognise that disclosure should be proportionate. Thus, small or non-complex firms will only be expected to provide “some qualitative information and very basic quantitative information”. A further consultation on this topic is expected. For private, unlisted/non-publicly traded firms, a ‘public’ disclosure requirement is clearly inappropriate.
In other areas, CEBS takes a stricter approach:
Further clarification may be needed from CEBS on certain points:
The CRD3 remuneration rules overlap to some extent with the Alternative Investment Fund Managers Directive (AIFMD) provisionally agreed by the EU last month. However, the AIFMD is not expected to come into force until 2013.
All FSA regulated firms who are covered by CRD3 should consider: