Proportionality

We support the efforts of the authorities, at all levels, to implement remuneration requirements and, with regard to cross-border financial institutions, to align their approaches.
Our members that are in scope are essentially limited license investment firms, but also some limited activity investment firms. They merely act as agents for their clients. Their activities do not extend to the provision of credit, the acceptance of deposits or dealing on their own account, which recitals eight and nine, and article two of the regulation refer to with regard to credit and market risks. Therefore, a proportionate approach should be applied to them.

They operate an agency business model and are regulated on a gone concern, rather than going concern, basis. As an agent, an investment firm holding a limited license under MiFID, which carries out discretionary portfolio management, already maintains a comprehensive wind down plan as part of its current prudential regime under the Capital Requirements Directive (CRD). Under this model, an assessment of relevant contract terms is undertaken with a view to ensuring the adequacy of resources, including capital, to effect the orderly termination or transfer of mandates (which describe the nature and type of discretion given by the clients) and wind down of the entity. Therefore current wind‐down arrangements provide an additional safeguard to any failure risks. The need for capital instruments that can be bailed in may not be appropriate, even necessary, for such firms.

It is for this very reason that CEBS 2010 Guidelines on Remuneration Policies and Practices currently disapply the CRD’s more prescriptive elements (around remuneration committees and pay out processes) under CRD’s principle of proportionality. CEBS Guidelines ensure that Limited licence investment firms are not subject to those CRD requirements that are intended solely for the credit and market risks posed by credit institutions and proprietary trading investment firms – banks and investment banks.
Our first request is that a proportionate approach should continue to apply to limited licence investment firms, and that CEBS Guidelines under CRD III should either be formally extended to CRR / CRD IV or that EBA should copy over CEBS Guidelines into new Guidelines under CRD IV such that they continue to have the same effect. Paragraphs 25 – 6 of Section 5 recognises this.

We note that this request is already in line with European Commission, EBA and European Parliament thinking around maintaining a “proportionate” approach between banks, investment banks and asset managers:

1. Recital 66 of CRD IV takes up Recital 4 of CRD III in requiring member-state legislators to differentiate between types of institutions in a proportionate manner – and in particular so as not to require certain types of investment firms to comply with all of the principles;

2. CRD IV’s more complete and over-arching disapplication of rules for MiFID firms that neither trade on their own account (nor operate Multilateral Trading Facilities) nor hold client money (under CRR Article 4 and CRD IV Article 3) extends proportionality in such a way that “limited limited licence firms” (so to speak) are able to disapply CRD IV as a whole; and finally

3. The European Parliament’s recent acknowledgment that bank remuneration policy (the prescriptive 1:1 bonus cap) is inappropriate for aligning risks within UCITS managers ensures that the same read-across of the proportionality principle from CRD to AIFMD is now logically extended to UCITS. Limited licence investment firms, less “risky” AIFMs and less “risky” UCITS managers are now all entitled to disapply those elements of CRD policy that they deem inappropriate in the context of the credit and market risks they pose.

Our second request is that this proportionate approach should also be extended to include the ability to disapply the EBA’s proposed Regulatory Technical Standards (RTS) on classes of instruments that are appropriate to be used for the purposes of variable remuneration under Article 94 (2) of the proposed Capital Requirements Directive. We would thus recommend that the EBA’s proposed RTS are explicitly qualified by Recital 66 of CRD IV (replicating Recital 4 of CRD III) and that Member States are required to differentiate the application of the RTS themselves on the basis of institution type.

Demand for such instruments

We do not know if there is a demand for such instruments, but think that as 40% of the investors, i.e. the employees of the issuers, can sell their stock of bonds, in whole or in part, after their deferral and retention periods have expired, demand and pricing may face downward pressure.

Trigger for the conversion of such instruments

Publicly known triggers would be more appropriate than triggers where the authorities can exercise discretion, i.e. certainty is preferable.
Interest rates and indices for such instruments

The 6% cap may shut out some issuers as the inflation rates in their sovereigns exceed that limit.

It would be more appropriate for the EBA to link the proposed cap’s index to existing instruments, the CRD and draft Recovery and Resolution Directive (RRD) rather than a stand alone index.

A link to credit quality would be equally appropriate. This would be particularly helpful for issuers in third countries.

Prospectus Directive

It would be helpful for the European Securities and Markets Authority (ESMA) to opine on the treatment of investors as there are effectively two types, employees of the issuer and external investors.