Response to consultation Paper on Draft Guidelines on sound remuneration policies under Directive 2013/36/EU
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Based on a self-assessment, credit institutions have the responsibility to identify those employees whose professional activities have a material impact on the institution’s risk profile (“Risk Takers”). Article 101 of the Draft Guidelines requires institutions to periodically update the self-assessment during the year at least with regard to the qualitative criteria under Article 92(3) of Directive 2013/36/EU and the related RTS (EBA/RTS/2020/05). Article 89 of the currently applicable Guidelines (EBA/GL/2015/22) is more specific in that matter outlining that the intra-year update of the self-assessment shall ensure that “staff who fall or are likely to fall under the criteria in Article 3 for a period of at least three months in the financial year” are identified as Risk Taker. Consequently, the whole bonus awarded for the financial year, in which the employee held a qualitative Risk Taker function for a minimum of three months, is subject to the strict Risk Taker requirements as applicable (e.g. target measurement, deferral scheme, malus/clawback). Vice versa, if an employee currently holds a Risk Taker function for less than three months in the financial year, we understand that the Risk Taker requirements offer the possibility to apply the Risk Taker requirements as applicable (e.g. target measurement, deferral scheme, malus/clawback) on a pro rata basis. As the sentence with the three-months-rule has been deleted entirely in the Draft Guidelines, the identification rule would become more stringent meaning that all employees who fall under a qualitative criterion for at least one day in the financial year have to be identified and treated as Risk Takers with their entire bonus award. In particular in case an employee takes over a Risk Taker function very late in the financial year, his/her entire bonus awarded for the financial year would be subject to the Risk Taker requirements. This would cause challenges (e.g. adaption of individual targets), which seem inappropriate from an administrative perspective as well as would not reflect the individual sphere of influence throughout the year. Therefore, and similar to the currently applicable Guidelines, we would recommend specifying a time period such as the three-months-rule.
Unchanged to the currently applicable Guidelines (EBA/GL/2015/22), Risk Takers are subject to ex-post risk adjustment mechanisms such as malus and clawback (rf. Article 94(1) CRD IV in conjunction with Article 287 of the Draft Guidelines). Article 293 of the Draft Guidelines further specifies the application of these ex-post risk adjustment mechanisms: in case the respective criteria are fulfilled, malus could only be applied in case the bonus award is subject to deferral (i.e. above the absolute or relative exemption limits according to Article 94(1) CRD IV), while clawback could be applied in any case independent from the size of the actual bonus award. Compared to the currently applicable Guidelines, this specification for clawback tightens the application rules in a way which seems inappropriate taking into account a local labour market, administrative and individual perspective. In many jurisdictions, such as Germany, clawback provisions, in particular for employees below the management body, are uncommon and are a unique labour law element for the financial industry. Therefore, the tightening of the clawback rules could negatively impact the attractivity of the financial industry for highly qualified and extensively demanded functions (e.g. in IT) as qualified individuals may restrain from taking over a dedicated function in credit institutions. In addition, when the current EBA Guidelines (EBA/GL/2015/22) became effective as of 2017, the amendment of existing Risk Taker employment contracts to implement the clawback provision was very challenging even though the principle of proportionality was applicable as clawback could only be applied if the bonus award is subject to deferral. The tightening of the application rules on clawback would eventually mean that all existing Risk Taker employment contracts need to be amended again. Considering the above mentioned, it would be highly appreciated if the application rules for clawback will be amended to provide local regulators the flexibility to reflect the principle of proportionality similar to the currently available Guidelines.
Question 1: Are the amendments to the subject matter, scope and definitions appropriate and sufficiently clear?
According to Article 12 of the Draft Guidelines, the revised requirements shall become effective as of 26 June 2021. To avoid the application of two different sets of regulatory requirements (the currently applicable EBA/GL/2015/22 and the Draft Guidelines) and considering management as well as operational challenges, we would highly appreciate if EBA could introduce transitional rules similar to Article 11 of the Consultation Paper on Draft Guidelines on sound remuneration policies under Directive (EU) 2019 (EBA/CP/2020/26) stating that the remuneration policies should be in line with the Draft Guidelines as of the performance year 2022.Question 5: Is the section 8.4 on retention bonuses sufficiently clear?
Comment to Section 5 (identification process):Based on a self-assessment, credit institutions have the responsibility to identify those employees whose professional activities have a material impact on the institution’s risk profile (“Risk Takers”). Article 101 of the Draft Guidelines requires institutions to periodically update the self-assessment during the year at least with regard to the qualitative criteria under Article 92(3) of Directive 2013/36/EU and the related RTS (EBA/RTS/2020/05). Article 89 of the currently applicable Guidelines (EBA/GL/2015/22) is more specific in that matter outlining that the intra-year update of the self-assessment shall ensure that “staff who fall or are likely to fall under the criteria in Article 3 for a period of at least three months in the financial year” are identified as Risk Taker. Consequently, the whole bonus awarded for the financial year, in which the employee held a qualitative Risk Taker function for a minimum of three months, is subject to the strict Risk Taker requirements as applicable (e.g. target measurement, deferral scheme, malus/clawback). Vice versa, if an employee currently holds a Risk Taker function for less than three months in the financial year, we understand that the Risk Taker requirements offer the possibility to apply the Risk Taker requirements as applicable (e.g. target measurement, deferral scheme, malus/clawback) on a pro rata basis. As the sentence with the three-months-rule has been deleted entirely in the Draft Guidelines, the identification rule would become more stringent meaning that all employees who fall under a qualitative criterion for at least one day in the financial year have to be identified and treated as Risk Takers with their entire bonus award. In particular in case an employee takes over a Risk Taker function very late in the financial year, his/her entire bonus awarded for the financial year would be subject to the Risk Taker requirements. This would cause challenges (e.g. adaption of individual targets), which seem inappropriate from an administrative perspective as well as would not reflect the individual sphere of influence throughout the year. Therefore, and similar to the currently applicable Guidelines, we would recommend specifying a time period such as the three-months-rule.
Question 6: Is the amended section 9 on severance payments sufficiently clear?
Comment to Section 15.7 (Malus and clawback):Unchanged to the currently applicable Guidelines (EBA/GL/2015/22), Risk Takers are subject to ex-post risk adjustment mechanisms such as malus and clawback (rf. Article 94(1) CRD IV in conjunction with Article 287 of the Draft Guidelines). Article 293 of the Draft Guidelines further specifies the application of these ex-post risk adjustment mechanisms: in case the respective criteria are fulfilled, malus could only be applied in case the bonus award is subject to deferral (i.e. above the absolute or relative exemption limits according to Article 94(1) CRD IV), while clawback could be applied in any case independent from the size of the actual bonus award. Compared to the currently applicable Guidelines, this specification for clawback tightens the application rules in a way which seems inappropriate taking into account a local labour market, administrative and individual perspective. In many jurisdictions, such as Germany, clawback provisions, in particular for employees below the management body, are uncommon and are a unique labour law element for the financial industry. Therefore, the tightening of the clawback rules could negatively impact the attractivity of the financial industry for highly qualified and extensively demanded functions (e.g. in IT) as qualified individuals may restrain from taking over a dedicated function in credit institutions. In addition, when the current EBA Guidelines (EBA/GL/2015/22) became effective as of 2017, the amendment of existing Risk Taker employment contracts to implement the clawback provision was very challenging even though the principle of proportionality was applicable as clawback could only be applied if the bonus award is subject to deferral. The tightening of the application rules on clawback would eventually mean that all existing Risk Taker employment contracts need to be amended again. Considering the above mentioned, it would be highly appreciated if the application rules for clawback will be amended to provide local regulators the flexibility to reflect the principle of proportionality similar to the currently available Guidelines.
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