In our view, the RTS would gain in clarity of expression if the identification criteria directly set out in the Directive CRD V were also included in the text of RTS. This would avoid cross-checking two sub-sets of criteria (CRD V and RTS), and would result in one single exhaustive list of criteria in one single document, like in the current RTS.
In terms of application date, we assume that the first application of these new RTS would be at the earliest on 2021 performance year for the identification of 2021 identified staff and we understood that due to the application date of the IF directive the RTS could be applicable only as from 2022 performance year.
On Article 7 paragraph, our understanding is that when identifying material risk takers on a consolidated basis, the criteria of Art. 7(1)(b) does not apply (> 0.3% of highest remunerations), and only applies on a solo basis at the level of the institution (parent company and its branches).
In the context of the Brexit, the French banking industry wishes to point out to European authorities that if future remuneration policies for credit institutions in the UK should tend to diverge from those applying in the EU (in particular as regards the application of the RTS and remuneration requirements), then this should be taken into account by the European Commission in its third country equivalence decisions for financial services. Otherwise this would lead to unlevel playing field situations for EU institutions compared UK banks.
Furthermore, attracting the people with the right competence is particularly crucial as the digitalisation is going to progressively direct banks towards new activities, such as added value partnerships with clients (advisory, structuring,..), liquidity and risk transformation and intermediation , in short what cannot be replaced by Machine Learning or Artificial Intelligence. In this context it is particularly key to maintain a level playing field regarding remuneration rules.
As far as the definition of Managerial Responsibility is concerned, we consider that it is unclear and too broad :
- it refers to “business unit” and not “material business unit” ; Article 92(3) CRD refers to “staff members with managerial responsibility over the institution’s control functions or material business units”. So the concept of managerial responsibility is only relevant when it relates the control functions or material business units. The mandate in Article 94(2) to define managerial responsibility should be read in that context. Part a of Article 2 of the draft RTS should therefore refer to material business unit, not just to business unit.
In addition :
- business unit, subordinated business unit and subordinated control function are not defined
- Point (b) of Art.2 suggests that managerial responsibility refers also to management of a subordinated unit or subordinated control function, and reporting to a Head of unit or control function.
- there is no reference to decision making power/duties and authority of the staff member in relation to the institution risk profile or material business unit profile
In practice, this definition may capture a population which includes staff located in an MBU but without the authority to take decisions with significant impact on the institution or material business unit’s risk profile, for example the head of HR of an MBU, Chief of Staff, Head of project office…
We consider that the definition should be clarified/more precise and propose the following definition:
a/ the staff member heads a material business unit or a control function and is directly accountable to the management body as a whole or to a member of the management body or to the senior management
b/the staff member heads a subordinated unit within a Material Business Unit or a subordinated control function within a Control function and :
-has authority to take decisions with significant impact on the institution risk profile or on a material business unit’s risk profile and
- reports directly to a staff member referred to in point (a)
Article 3 :
As far as the definition of Control function is concerned :
The definition is less precise than in the previous RTS and unclear : « function independent from the business units that it controls , which has a responsibility to provide objective assessments of risks, reporting and assurance. This includes, but is not limited to the risk management function, the compliance function, and the internal audit function.”
It is not mentioned to whom the objective assessments of risks, reporting and assurance are meant to be provided ; could it be clarified that it would be to the Management Body or to the senior management as the function has to be independent from the business that it controls ?
We do not understand which other functions (apart from risk, compliance and internal audit) are concretely targeted. Reporting and assurance do not refer to any function and this wording is not clear neither helpful.
In consistency with what is defined in the EBA Guidelines EBA/GL/2017/11 on 26 September 2017 on internal governance and to ensure a consistent application of the criteria across the European Union, we would suggest to keep the same approach and rationale as the definition given for the heads of controls functions, i.e. “the persons at the highest hierarchical level in charge of effectively managing the day-to-day operation of the independent risk management, compliance and internal audit functions.”.
As a consequence, our alternative proposal would be:
“Control function” shall be defined as a function independent from the business units that it controls, which has a responsibility to provide objective assessment of risks, compliance and controls to the management body and to the senior management. It relates to risk, compliance and internal audit functions.
Article 4 :
The definition of “Material business unit” is broader than in the current RTS with article 4 (b) « it provides a critical function or a core business as defined in points 35 and 36 of paragraph 2 of Article 2 of Directive 2014/59/EU ». Could EBA provide concrete examples of critical function targeted ?
We consider that critical functions are already covered through the identification of MRT within Article 2 and 3 and through the other functions precisely targeted in the article 6.
It is mentioned in Article 5 that we should define « qualitative et quantitative metrics to determine whether the professional activities of staff or categories of staff have a significant impact on the material business unit ‘s risk profile” on the basis of 6 criteria.
EBA does not give any example of “qualitative and quantitative metrics” , which can lead to a large disparity of views from one institution to another. Setting out metrics in view of the 6 criteria looks extremely complicated for the institution and may also be complicated to understand. When looking at the 6 criteria and at the purpose of Article 5, we think that “objective criteria” would be more appropriate, feasible and understandable than “qualitative and quantitative metrics”. Besides we consider that imposing that all these criteria be set up in the institution remuneration policy may be too complex and not allow for the necessary flexibility and adaptability. Our understanding is that the purpose of the RTS is not to indicate the document which should incorporate the criteria, but rather indicate the type of criteria which should be taken into account.
As regards point f, we suggest to suppress the first part of the sentence for sake of clarity.
For sake of clarity, we suggest to systematically refer in Article 5 to « material business unit » and not to “business unit”.
Our alternative proposal for the definition of Material Business Unit would be:
For the purpose of applying point (c) (ii) of paragraph 3 of Article 92 of Directive 2013/36/EU, institutions shall set out qualitative or quantitative metrics objective criteria to determine whether the professional activities of staff or categories of staff have a significant impact on the material business unit’s risk profile, taking into account the following factors:
a) the risk profile of the material business unit as defined by Article 73 of Directive 2013/36/EU;
b) the institutions’ overall risk strategy and risk appetite;
c) the risk limits of the material business unit;
d) the relevant risk and performance indicators used by the institution to identify, manage and monitor risks of the material business unit in accordance with Article 74 of Directive 2013/36/EU;
e) the relevant performance criteria set by the institution under points (a) and (b) of paragragh 1 of Article 94 of Directive 2013/36/EU;
f) the professional activities, including the duties and authorities of staff members or categories of staff.
Article 6 :
The mandate in the CRD to define managerial responsibility does not itself require EBA to use the term in Article 6. The definition of managerial responsibility would suggest that not only the staff member in charge of the legal affairs is identified under this item, but also the direct reports heading subordinated units. This would significantly expand the list of identified staff in the support functions who do not have direct impact on the risk profile of the institution, which would be a significant extension of the current criteria, and would not allow a consistent application among the banks.
It would be more relevant and clearer to come back to the current RTS into force, in particular Article 3.9 and have in Article 6 (1) « the staff member heads /is responsible for a function” instead of “the staff member has managerial responsibilities for ».
Indeed, if we agree to extend the list of the support functions targeted to additional functions such as “the prevention of money laundering and terrorist financing” and “security” to capture functions that may have a material impact on the institution risk profile, we consider that the new wording “the adequacy and appropriateness of accounting procedures” is not clear enough. Finance, taxation and budgeting which are targeted in the current RTS is clearer.
Concerning “human resources” and “remuneration policy”, we do not understand the reason why it has been added “dealing with human resources” and “development or implementation of the remuneration policy” : Even if employees identified are limited to employees with managerial responsibility, in banking groups, many employees are in charge within business units or control functions of dealing with Human resources and implementing remuneration policy without having any impact on the institution risk profile. They have limited delegation power to apply a remuneration policy which would be different from the Group remuneration policy, and they only apply and implement the Group principles.
Finally, “managing outsourcing arrangements of critical or important functions” is not clear : the term does not appear in the CRD and it does not represent an existing function within the organization but is directly managed through the strategy of the businesses. In this context, we consider that this criterion and function should be deleted.
For sake of clarity, our alternative proposal would be to come back to Article 3.9 of the current RTS
for article 6 §1 as follows:
“1) the staff member heads/is responsible for the following functions:
(a) legal affairs;
(b) Finance, budgeting and definition of accounting norms;
(d) the economic analysis;
(e) the prevention of money laundering and terrorist financing;
(f) the human resources;
(g) the remuneration policy;
(h) the information technology or IT security
For 6(2), in our view “managerial responsibilities” should be replaced by “is in charge of a risk category“ or “has authority to take decisions for a risk category” and “is a member of a committee” should be replaced by “is a voting member of a committee” for consistency with the criteria 3 and 4 of Article 6.
“ (2) the staff member has managerial responsibilities authority to take or approve decision for a risk category set out in Articles 79 to 87 of Directive 2013/36/EU other than credit risk and market risk or is a voting member of a committee responsible for the management of a risk category provided for in Articles 79 to 87 of Directive 2013/36/EU other than credit risk and market risk;”
For 6 (5), we consider that “ the staff member has managerial responsibilities in a group of staff members…”should be replaced by “ the staff member is the head of a group of staff members …”
For the application of the other quantitative criteria, we understand that the threshold to take into account for the application of the quantitative criteria is :
1/ In the case of a staff member performing a professional activity within a material business unit and the activity is of a kind that has a significant impact on the relevant business risk’s profile :
the minimum level among the below 3 thresholds :
- Threshold 1: The maximum between 500K€ and the average remuneration awarded to the members of the institution ‘s management body and senior management
- Threshold 2: 750K€
- Threshold 3 : resulting from the application of the 0,3% criteria as defined in 7,1(b), on the individual basis
2/ in the case of a staff member or category of staff for whom the institution determines that the staff member or the category of staff is (i) carrying out professional activities and having authorities in a business unit which is not a material business unit as defined in Article 4 or (ii) is carrying out professional activities which do not have a significant impact on the risk profile of a material business unit having regard to the criteria set out in paragraph 1 of Article 5
The threshold to apply for identification under the quantitative criteria would be the minimum level between :
- Threshold 2: 750K€
- Threshold 3 : resulting from the application of the 0,3% criteria as defined in 7,1 (b) on the individual basis
If the institution can demonstrate that the staff member or category of staff satisfies (i) or (ii) to the competent authority in charge of its supervision and get its prior approval (that shall only be given in exceptional circumstances if the staff member was awarded total remuneration of EUR 1 000 000 or more in the preceding financial year) :
- The staff member or category of staff falling under case 2 will not be identified based on the regulator’s prior approval
Could EBA confirm that this understanding is correct in a Q&A ?
Exemption for subsidiaries subject to specific remuneration requirements
For avoidance of doubt, we consider the EBA should include following clarification in the RTS :
As per Recital 10 and the Article 36 of the Directive 2019/878, notwithstanding the decision of the competent Member Sate, the remuneration requirements laid down in Articles 92, 94, and 95 of the amended CRD4, (“the Remuneration Requirements”) shall not apply on a consolidated basis to subsidiaries undertaking, established in the Union where they are subject to specific remuneration requirements in accordance with other Union legal acts, or established in a third country where they would be subject to specific remuneration requirements in accordance with other Union legal acts if they were established in the Union. As a result, for these undertakings, (“the Exempted Entity(ies)”) the related RTS and remuneration requirements do not apply to their members of staff.
However to prevent possible circumvention, the requirements laid down in Articles 92, 94 and 95 of the amended CRD4 apply on an individual basis to their members of staff acting on behalf of an asset manager or providing services listed in points 2, 3, 4, 6 and 7 of Section 1 of Annex I to Directive 2014/65/EU and which have been mandated to perform professional activities that have a direct material impact on the risk profile or the business of the institutions within the group. More precisely, members of staff performing services like asset management, portfolio management or execution of orders, from an Exempted Entity, are not subject on an individual basis to the application of RTS and remuneration requirements, unless they are mandated via delegation or outsourcing arrangements concluded (explicitly or not) between the Exempted Entity employing them and another not-Exempted Entity belonging to the group.
We understand, based on the explanation given on page 11 Recital (15), that, for the purpose of the identification of identified staff for 2021, the calculation of Remuneration awarded would refer to Fixed compensation awarded in 2020 and Variable compensation awarded in reference to 2019 performance year.
There is no necessity to finalise the identification at the beginning of the year (it is not even possible due to the requirement of identifying staff members who have held an identified position for a minimum of 3 months). Besides, it makes more sense for firms and staff to consider the remuneration (fixed + variable) for the same performance year.
We understand that the only reason for taking the variable compensation awarded in reference to 2019 performance year and not to 2020 performance year is to allow the institutions that intend to submit exemption requests to be able to submit their exemption requests in due course, if the Variable compensation is awarded too late in the year to allow them to respect the exemption submission deadline.
For institutions which do not use the possibility to ask for exemptions, or would be able to submit exemption requests in due course, could EBA give them the flexibility to calculate the Remuneration awarded in 2020 as the Fixed Remuneration awarded in 2020 and the Variable remuneration awarded on the basis of 2020 performance year? That allows a more relevant and conservative risk approach by identifying more rapidly members of staff whose Total Compensation awarded in reference to the precedent performance year is above the threshold.
We consider that the RTS should be significantly simplified for small and non complex institutions and take into account their simple organization as well as the small size of teams that would be encharged of applying the RTS : we consider that it is not appropriate to apply all the criteria to small and non-complex institutions in particular those which are subsidiaries of banking groups, which already apply the criteria at the Group consolidated level and which already benefit from an exemption on deferral and indexation by application of the 94.3 a) of CRD5.
Indeed, in large banking groups the potential material risk takers are supposed to be already identified at the consolidated level of the Group and for these institutions, the risk is supposed to be limited and, except the application of the bonus cap, neither the deferral nor the indexation would be applicable to the identified staff. Consequently, a heavy and complex identification process of the potential material risk takers at individual level would only represent an additional administrative burden for these small and non complex institutions and for the Group without any impact on the risk management. The process would be too burdensome both at the level of the small and non complex entities and at the level of the Group (which might have a large number of such subsidiaries) in view of the issues at stake, and may also be detremental to the attractivity of these small and non complex entities as regards other sectors.
In the context of a banking Group, for small subsidiaries which benefit from an exemption according to the application of the 94.3 a) of CRD5, our alternative proposal would therefore be to limit the identification criteria to
- the members of the management body,
- the senior management, and
- possibly the heads of control functions if any at the subsidiary level (they are frequently already identified at the consolidated or subconsolidated level),
but not to apply the other criteria such as detailed in the present draft RTS, that appear to be irrelevant for the application of the principles on a solo basis at the level of each small subsidiary on top of the application on a consolidated basis at Group level