Response to consultation on draft RTS on the minimum content of the governance arrangements on the remuneration policy under MiCAR
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We further suggest a modification of “Business unit” to exclude “legal entity” as " Business unit" is generally considered a section within the same organization and not necessarily a separate legal entity. Separate legal entities under one parent company are usually referenced as a group. Although a ‘Business unit’ can include operations within such a group, it usually applies to the business operations and not entities involved in the operations.
Thus, we suggest the definition be corrected to say that a “Business unit” applies to a business line and/or operates as a separate part of the whole business.
We also suggest amending the definition of “Control function.” Namely, it is unclear whether its purpose is to establish a requirement for a separate function in addition to compliance, risk management, and audit functions or whether this applies to internal control procedures within different departments/units. We kindly ask the regulator to provide further clarity regarding the definition of a “Control function” and whether it can be vested with the same personnel conducting audits or leading compliance and risk management procedures within such a Business unit.
For simplicity, we also suggest using an “Obliged Entity” definition for the issuer of significant asset-referenced tokens or other entities that the RTS apply to.
We suggest the managerial responsibility definition be amended to apply to a staff member who falls under points (a) or (b) and has the authority to enter into legal transactions or to make independent personnel and organizational decisions. We deem this necessary as many employees may be addressed as managers (or are ‘heading’ a particular position) in practice but have no real powers within the company and should be more appropriately considered as “leads”.
We also suggest adapting the definition of “Senior Management” to only apply to the management body and management body members as persons appointed to duly represent the company and/or holding executive functions within an issuer of significant ARTs. Such a management body should only be understood to consist of legal representatives or persons with actual executive powers. We believe that clarity regarding executive powers is needed as some companies may not have an official “senior” management layer or may refer to several heads of departments as “senior.” Bearing this in mind, we kindly ask the regulator to consider a ‘substance over form’ approach and prioritise legal and actual executive powers over the title itself.
If the above suggestion for clarification is not considered and approved, we propose the regulator consider different practices among companies. On this note, our esteemed members suggested an alternative according to which the obliged entities shall include the definitions of the management body, senior managers, and managerial responsibilities within their internal policies.
Finally, we kindly ask the regulator to provide further clarity regarding the definition of “Staff” and explain whether the definition extends to contractors who have the same status as employees within the organization.
We also observe that Article 2 refers to the ‘remuneration committee’, which is not defined or mentioned anywhere else. We kindly suggest the regulator includes this special committee under defined terms in Article 1 and provides further clarity regarding the committee’s constitution, desired members, non-obligatory nature, external expert members, and similar intricacies. In cases where the obliged entity would have a supervisory board, such a remuneration committee may often be made part of it as a specialized committee under the supervisory board.
The regulator may also consider the distinction between a supervisory board and a remuneration committee and whether the supervisory board shall provide consent to the remuneration policy as a mandatory requirement.
each regulated independently. This diversity and the existence of lex specialis can lead to systemic inconsistencies when embedding ESG principles into other policy areas.
A critical observation in this context is that the demand for incorporating ESG policies into remuneration could create conflicts between various regulatory standards. For instance, the requirements for an ESG-focused remuneration policy might align differently with the overall requirements, reporting mechanisms, and obligations prescribed by specific legislation governing environmental assessment or tax transparency reports. Where the existing lex specialis would not contribute to potential conflicts and inconsistency, we believe the issuers may be unreasonably burdened with similar responsibilities under two regimes.
We agree with the notion that organizations must navigate the intricate balance between adhering to ESG principles and complying with established legal and regulatory frameworks specific to their operations. Failure to harmonise these aspects effectively on the side of regulations could,lead to regulatory and operational challenges, diluting the effectiveness of ESG initiatives and possibly impacting corporate compliance and governance standards.
“Issuers of significant asset-referenced tokens shall consider staff that meet one or more of the following criteria listed from a) to e) to have a material impact on their risk profile or the risk profile of the significant asset-referenced tokens they issue, but should also identify all other staff that has a material impact taking into consideration qualitative criteria reflected in the list from a) to f).”
Article 4(2) point (f) may affect personnel who are contracted but not employed by the issuer. Further guidelines may be needed to distinguish between those who fall under the ‘Staff’ category.
Considering the responses we received from our members and community of respected CASPs, the requirements to define variable remunerations consist of too many things to be considered. This makes the practical implementation of variable remuneration too complicated. Further, the critical element of variable remuneration is missing – an incentive to achieve the best results that align with the obliged entity’s strategy and goals. Linking variable remuneration to all
proposed criteria makes it only available to certain functions and not all other potential staff members.
To encourage market participants to use the proposed variable remuneration and avoid rewards or bonuses, which may also be expected in practice, we kindly ask the regulator to consider a more practical approach and make this option readily available.
We additionally propose enhancing the clarity of Article 5(1), precisely point (k), by offering a more explicit definition or incorporating additional criteria that can aid in determining what qualifies as a "particularly high amount" of variable remuneration. This would provide a more comprehensive understanding of when a specific sum can be categorized as such.
Lastly, we find Article 5(1)(n) challenging as it ensures that the variable remuneration is awarded and vests only if it is sustainable according to the financial situation of the issuer as a whole and justified based on the performance of the issuer, of the business unit and of the staff member concerned.
This point is particularly subject to criticism as the variable remuneration forms a part of an expected salary and thus cannot depend on the financial situation of the obliged entity. This clause could present a breach of basic employment regulation and undermine an employee's right to their salary. We deem it essential to note that the variable remuneration is not a bonus or success share.
We call for a comprehensive reevaluation of the requirements of variable remuneration, and at minimum, omission of points i), k), l) and ask for clarity on the interpretation of variable remuneration as variable salary, keeping the interest of employees within eyesight as the suggested clause and requirements are simply too restrictive to be implemented in practice.
However, the regulator is correct to observe that the market experience on these instruments is still limited, and the risks may still need to be fully understood or predicted. Therefore, the regulator should allow for a more flexible variable remuneration. While EBA is not limiting the variable remuneration to 50%, it limits this 50% of variable remuneration to a specific consistency as it states that “at least 50% of the variable remuneration” should consist of one of the forms prescribed in Article (5)(1) point (i). While we recognise such limitation of consistency may be due to the simplicity of reporting and governance, we propose the regulator consider
allowing other forms of payments or benefits, both financial and non-financial. With this, the regulator could achieve similar effects to Point (40) of the MiFID II Delegated Regulation (EU) 2017/565.
As a general note, we consider such variable remuneration appropriate insofar as it is agreed upon between the employer and employee and strongly advise against imposing restrictions as provided in Article 5.
Question 1. Are the definitions within Article 1 appropriate and sufficiently clear?
We believe that the Guidelines could be further equipped with the definition of “Remuneration” as well as broad definitions for “Quantitative criteria” and “Qualitative criteria” to be taken into account when determining staff remuneration.We further suggest a modification of “Business unit” to exclude “legal entity” as " Business unit" is generally considered a section within the same organization and not necessarily a separate legal entity. Separate legal entities under one parent company are usually referenced as a group. Although a ‘Business unit’ can include operations within such a group, it usually applies to the business operations and not entities involved in the operations.
Thus, we suggest the definition be corrected to say that a “Business unit” applies to a business line and/or operates as a separate part of the whole business.
We also suggest amending the definition of “Control function.” Namely, it is unclear whether its purpose is to establish a requirement for a separate function in addition to compliance, risk management, and audit functions or whether this applies to internal control procedures within different departments/units. We kindly ask the regulator to provide further clarity regarding the definition of a “Control function” and whether it can be vested with the same personnel conducting audits or leading compliance and risk management procedures within such a Business unit.
For simplicity, we also suggest using an “Obliged Entity” definition for the issuer of significant asset-referenced tokens or other entities that the RTS apply to.
We suggest the managerial responsibility definition be amended to apply to a staff member who falls under points (a) or (b) and has the authority to enter into legal transactions or to make independent personnel and organizational decisions. We deem this necessary as many employees may be addressed as managers (or are ‘heading’ a particular position) in practice but have no real powers within the company and should be more appropriately considered as “leads”.
We also suggest adapting the definition of “Senior Management” to only apply to the management body and management body members as persons appointed to duly represent the company and/or holding executive functions within an issuer of significant ARTs. Such a management body should only be understood to consist of legal representatives or persons with actual executive powers. We believe that clarity regarding executive powers is needed as some companies may not have an official “senior” management layer or may refer to several heads of departments as “senior.” Bearing this in mind, we kindly ask the regulator to consider a ‘substance over form’ approach and prioritise legal and actual executive powers over the title itself.
If the above suggestion for clarification is not considered and approved, we propose the regulator consider different practices among companies. On this note, our esteemed members suggested an alternative according to which the obliged entities shall include the definitions of the management body, senior managers, and managerial responsibilities within their internal policies.
Finally, we kindly ask the regulator to provide further clarity regarding the definition of “Staff” and explain whether the definition extends to contractors who have the same status as employees within the organization.
Question 2. Are the provisions within Article 2 appropriate and sufficiently clear?
Yes, however, we kindly ask for additional clarity on whether the remuneration policy and changes thereof further trigger the revision of employment contracts and related agreements or agreements of a similar nature to ensure the policies are respected in the actual agreements.We also observe that Article 2 refers to the ‘remuneration committee’, which is not defined or mentioned anywhere else. We kindly suggest the regulator includes this special committee under defined terms in Article 1 and provides further clarity regarding the committee’s constitution, desired members, non-obligatory nature, external expert members, and similar intricacies. In cases where the obliged entity would have a supervisory board, such a remuneration committee may often be made part of it as a specialized committee under the supervisory board.
The regulator may also consider the distinction between a supervisory board and a remuneration committee and whether the supervisory board shall provide consent to the remuneration policy as a mandatory requirement.
Question 3. Are the provisions within Article 3 appropriate and sufficiently clear?
Integrating Environmental, Social, and Governance (ESG) considerations into various corporate policies, including remuneration policies, represents a complex and multifaceted challenge for organisations. The broad scope of ESG encompasses a diverse range of topics and domains,each regulated independently. This diversity and the existence of lex specialis can lead to systemic inconsistencies when embedding ESG principles into other policy areas.
A critical observation in this context is that the demand for incorporating ESG policies into remuneration could create conflicts between various regulatory standards. For instance, the requirements for an ESG-focused remuneration policy might align differently with the overall requirements, reporting mechanisms, and obligations prescribed by specific legislation governing environmental assessment or tax transparency reports. Where the existing lex specialis would not contribute to potential conflicts and inconsistency, we believe the issuers may be unreasonably burdened with similar responsibilities under two regimes.
We agree with the notion that organizations must navigate the intricate balance between adhering to ESG principles and complying with established legal and regulatory frameworks specific to their operations. Failure to harmonise these aspects effectively on the side of regulations could,lead to regulatory and operational challenges, diluting the effectiveness of ESG initiatives and possibly impacting corporate compliance and governance standards.
Question 4. Are the criteria of identification of staff appropriate and sufficiently clear?
Article 4(1) seems a bit ambiguous and may be articulated differently to provide more clarity:“Issuers of significant asset-referenced tokens shall consider staff that meet one or more of the following criteria listed from a) to e) to have a material impact on their risk profile or the risk profile of the significant asset-referenced tokens they issue, but should also identify all other staff that has a material impact taking into consideration qualitative criteria reflected in the list from a) to f).”
Article 4(2) point (f) may affect personnel who are contracted but not employed by the issuer. Further guidelines may be needed to distinguish between those who fall under the ‘Staff’ category.
Question 5. Are the provisions within Article 5 appropriate and sufficiently clear?
Article 5(1)(a) seems to contradict Article 3(1)(d), which specifically states that “the staff in control functions are remunerated per the achievement of the objectives linked to their functions and independently of the performance of the business areas they control”. Whereas Article 3(1)(d) only considers the achievement of staff, Article 5(1)(a) extends this and links it to the overall performance of the issuer itself.Considering the responses we received from our members and community of respected CASPs, the requirements to define variable remunerations consist of too many things to be considered. This makes the practical implementation of variable remuneration too complicated. Further, the critical element of variable remuneration is missing – an incentive to achieve the best results that align with the obliged entity’s strategy and goals. Linking variable remuneration to all
proposed criteria makes it only available to certain functions and not all other potential staff members.
To encourage market participants to use the proposed variable remuneration and avoid rewards or bonuses, which may also be expected in practice, we kindly ask the regulator to consider a more practical approach and make this option readily available.
We additionally propose enhancing the clarity of Article 5(1), precisely point (k), by offering a more explicit definition or incorporating additional criteria that can aid in determining what qualifies as a "particularly high amount" of variable remuneration. This would provide a more comprehensive understanding of when a specific sum can be categorized as such.
Lastly, we find Article 5(1)(n) challenging as it ensures that the variable remuneration is awarded and vests only if it is sustainable according to the financial situation of the issuer as a whole and justified based on the performance of the issuer, of the business unit and of the staff member concerned.
This point is particularly subject to criticism as the variable remuneration forms a part of an expected salary and thus cannot depend on the financial situation of the obliged entity. This clause could present a breach of basic employment regulation and undermine an employee's right to their salary. We deem it essential to note that the variable remuneration is not a bonus or success share.
We call for a comprehensive reevaluation of the requirements of variable remuneration, and at minimum, omission of points i), k), l) and ask for clarity on the interpretation of variable remuneration as variable salary, keeping the interest of employees within eyesight as the suggested clause and requirements are simply too restrictive to be implemented in practice.
Question 6. Is the possibility of paying a part of variable remuneration in significant asset-referenced tokens issued by the issuer appropriate also considering the still limited market experience on these instruments?”
We believe that the possibility of paying a part of variable remuneration in significant asset-reference tokens issued by the issuer is appropriate since the issuer is now regulated and bound to comply with rules that help mitigate the risks associated with such tokens appropriately.However, the regulator is correct to observe that the market experience on these instruments is still limited, and the risks may still need to be fully understood or predicted. Therefore, the regulator should allow for a more flexible variable remuneration. While EBA is not limiting the variable remuneration to 50%, it limits this 50% of variable remuneration to a specific consistency as it states that “at least 50% of the variable remuneration” should consist of one of the forms prescribed in Article (5)(1) point (i). While we recognise such limitation of consistency may be due to the simplicity of reporting and governance, we propose the regulator consider
allowing other forms of payments or benefits, both financial and non-financial. With this, the regulator could achieve similar effects to Point (40) of the MiFID II Delegated Regulation (EU) 2017/565.
As a general note, we consider such variable remuneration appropriate insofar as it is agreed upon between the employer and employee and strongly advise against imposing restrictions as provided in Article 5.