Regarding Article 2, the definition of “managerial responsibilities” should be restricted to staff who head a business unit or a control function and is directly accountable to either the management body as a whole, a member of the management body, or to the senior management. People per-forming functions that don’t have an impact on the entity’s risk will be included if it is considered that every head of a subordinated unit or a subordinated control function should be considered. Therefore, reference to them should be deleted.
Managerial Responsibility (Art 2):
- This definition should be restricted to staff who head a business unit or a control function and is directly account-able to either the management body as a whole, a member of the management body, or to the senior management. People performing functions that don’t have an impact on the entity’s risk will be included if it is considered that every head of a subordinated unit or a subordinated control function should be considered. Therefore, ref-erence to them should be deleted.
- In connection with the existing Regulation (EU) No 604/2014, the EBA clearly communi-cated that the identification as a risk taker should not depend solely on the organisation-al/hierarchical position of a function holder. If the function holder only bears the “corpo-rate title” mentioned in the Regulation but does not possess the requisite decision-making powers or responsibilities that would have a relevant impact on the institution’s risk pro-file, this function holder cannot be identified as a risk taker (see the EBA’s explanatory notes on the final draft of the Regulation dated 16 December 2013, EBA/RTS/2013/11, no 4.1 A. 19).
This proviso has also been expressed repeatedly in the present RTS draft. For instance, paragraphs 3 to 6 of Article 6 provide that the identification as a risk taker in accordance with the qualitative criteria listed in this provision would only be contemplated if the staff member had the relevant decision-making powers.
However, the definition of “managerial responsibility” in Article 2 does not include this re-quirement. In fact, the case group listed under letter a. fails to clearly state that heading a business unit or exercising a control function must be associated with actual responsibili-ties and decision-making powers that could potentially have a relevant impact on the insti-tution’s risk profile. This applies even more so to the category of staff members added un-der Article 2 letter b., who only head a subordinated unit.
The relevant risk taker can only be the person who ultimately decides whether or not a risk will be taken. A different approach would only apply if the decision-maker was unable to form an independent risk opinion due to a lack of specific professional or methodological competence. In this case, the staff member on the next lower level of the chain of com-mand who has voted in favour of the decision, and who possesses the requisite profession-al competence, may possibly be deemed to be the risk taker. As a rule, identification as a risk taker always requires, as a precondition, that the staff member is authorised to make risk-relevant decisions to this effect. This is not the case if someone on a higher level in the chain of command (e.g. the management body) is responsible for any such decisions, while the function holder is only tasked with the proper implementation of decisions made by someone else.
Moreover, Article 1 paragraph 1 of the RTS clearly states and prescribes that a material impact on an institution’s risk profile is always a mandatory criterion. No such impact ex-ists if the function holder does not make any relevant independent decisions at all. The ex-planatory notes for the RTS indicate that the EBA is proceeding on the assumption that a certain hierarchical position as such also comes with a certain set of responsibilities (p. 20, no 12). However, this is often not the case in the professional practice of small and non-complex institutions, as the members of the management body retain ultimate responsibil-ity for risk-relevant decisions. Oftentimes, in small and non-complex institutions, any im-portant decisions, including those with risk relevance, are exclusively prepared and taken at management body level. As a consequence of divisional heads being included in key func-tions, even large institutions often identify staff members who are only responsible for the proper implementation of management body decisions but not for the actual underlying de-cision. In these cases, the classification as risk taker is already flawed in substance. To this extent, the EBA’s assumption that, apart from the “members of the management body”, the “senior management” and the “head of control functions” always possess the responsi-bilities and decision-making powers required to take relevant risks on behalf of the institu-tion (p. 26, no 6) is mistaken.
Against this backdrop, the definition of “managerial responsibility” in Article 2, which in both case groups only relates to a certain position within the institution, is too broad. This necessitates an amendment that includes the requisite responsibilities and decision-making powers as an additional criterion along with the criterion of being a function holder. This could be effected along the same lines as the requirements for decision-making powers stipulated in Article 6 paragraphs 3 to 6.
- point (a) states that “the staff member heads a business unit or a control function […]”. This wording goes far beyond the legal basis of CRD V, since Art 92 (3) CRD V only refers to material business unit. To avoid gold plating we therefore ask to add “material” to the wording, so para (a) is as follows: “the staff member heads a material business unit or a control function […]”.
- point (b): the definition “the staff member heads a subordinated unit or subordinated control function and reports to a staff member referred to in point (a)” would lead to the inclusion of an es-sential number of B-3 staff members (4th management level). These staff members (4th management level) do in fact not have a material impact on the institutions risk profile. It could not be the intention of EBA to identify these staff members as MRTs and to create a huge workload for institutions.
Furthermore, the term “subordinated unit” in Article 2 letter b. should be defined in greater detail. It is unclear how many hierarchical levels below the management body level could potentially fall within this case group. Similarly, the relationship between “subordinated unit” and “business unit” as well as “material business unit” appears to require further ex-planation.
Overall, it is quite apparent that, depending on the viewpoint, the qualitative criteria have markedly increased, compared to the regulatory standards currently in force.
Thus far, Article 3(4) to (8) of Regulation (EU) No 604/2014 required that the heads of material business units and those of control functions, the risk managers of material busi-ness units and senior staff who report directly to these heads be identified. As far as special functions are concerned, only the heads of the relevant units were defined as risk takers (Article 3(9) of Regulation (EU) No 604/2014). In many institutions, the heads of these units are either part of the management body or part of senior management (in most cases, the level directly below the management body).
The proposed new definition could also be read to mean that staff members who report to senior management (often two levels below the management body) and staff members who report to those staff members (often three levels below the management body) are also in-cluded. This would be the case if they worked in the business units, control units or special functions mentioned in Article 2 letter b. As the definition of material business units is also being significantly expanded (see explanations regarding Article 4), this regularly results in the number of staff members needing to be identified multiplying. In these cases, however, the lower management level would generally not have any material impact on the risk pro-file of the relevant institution. This ap-pears to necessitate clarification.
A restriction to the heads of the aforementioned units (provided they report to the man-agement body or a member of the management body, i.e. deletion of any reference to the reporting lines to senior management) and to material business units as well as control units (and perhaps to the subordinated management level) would be more in line with the existing qualitative criteria.
Therefore we ask to delete para (b) of Art 2.
Control Function (Art. 3):
- The term “control function” is inherently expanded, compared to the current version, as the risk management function, the compliance function and the internal audit function are no longer the only functions included (“not limited to”). This broad interpretation cannot be inferred from Article 92 CRD V. Moreover, it results in uncertainties in terms of differ-entiation and greater uncertain-ty as to the application of the law. To ensure the compara-bility between the institutions also in future, the current definition (restriction to the three functions mentioned above, which are also mentioned as such in other EBA Guidelines) of the control function should be retained.
- In accordance with the mandate embodied in the CRD V, the EBA has developed defini-tions for terms such as “managerial responsibility”, “control functions” and “material busi-ness unit”. How-ever, in our view, these definitions do not provide for precise differentia-tion. To this extent, not only do they fail to aid users of the law but they are in fact open to – and even require – interpretation. Occasionally, this will significantly increase the institu-tions’ input into any review and explanatory measures. For this reason, it would be advisa-ble to refrain from including the above definitions.
Material Business Unit (Art 4):
- The current version fails to clearly specify the standards on which an institution’s assess-ment under Article 4 letter a., second option, should be based. To the extent that internal capital is not allocated, criteria for the determination of responsibility for a “material” business unit must be added in any case, and such criteria must express a comparable effect on the risk profile as the 2% specified in Article 4 letter a, first option. Where banks direct-ly allocate capital to individual business units, this is in any case a more explicit criterion. The second alternative of Article 4 letter a should therefore be restricted to banks that do not make any such allocation.
- The allocation of an internal capital of at least 2% of the internal capital of the institution is difficult to allocate for small institutions. Therefore, for reasons of proportionality, we propose to make a distinction for small and non-complex institutions (total assets of EUR 5 billion) and to use for small and non-complex institutions the internal capital of the con-solidating institution.
- Moreover, it remains unclear what exactly constitutes a “business unit”. This results in sig-nificant uncertainties in practice. For instance, the German version of the CRR uses the same term (Geschäftsbereich) in both the provisions of Article 142(1) no 3 CRR and Arti-cle 450(1) letter g CRR. This would suggest that “retail banking”, “asset management” and “investment banking” would have to be identified as “business units”. Such business units would be material if they reached the capital threshold in accordance with the current RTS. We therefore respectfully request that an appropriate definition be included.
- For clarification purposes it would be desirable if “material business units” did not have to be identified under both letters a. and b. but solely in accordance with one of the criteria.
- With regard to Article 4 letter b., the reference to a core business line as defined in Di-rective 2014/59/EU is too broad. This applies in particular against the background of Ar-ticle 7 paragraph 2 letter a., which provides that the actual position and decision-making powers in a core business line as such preclude any rebuttal of an identification based on quantitative criteria under paragraph 2 letter a.
Material business unit and significant impact on the material business unit’s risk profile (Art. 5):
It is unclear why the insertion of Article 5 is necessary at all. The introductory sentence suggests that the insertion is intended to assist in the implementation of Article 92(3) letter c (ii) CRD V. However, this is presumably the function of Article 6, whose specific function is to delineate cases that have a material impact. The insertion of the additional and highly discretionary provision of Article 5, which also requires interpretation, therefore appears to be unnecessary. This provision would significantly increase the overall complexity for institutions and counteract the original ob-jective of the RTS, i.e. improved comparability between companies. For proportionality reasons we therefore ask to delete this provision for small and non-complex institutions due to bad cost/benefit-relation.
Qualitative Criteria (Art. 6):
In line with our comments to question 2, referring to staff who perform “managerial responsibili-ties” could include staff performing functions that don’t have an impact on the entity’s risk but who are the head of a subordinated unit or a subordinated control function. Therefore, the refer-ence to “managerial responsibilities” should be deleted in Article 6 and substituted by the person who “heads the” …, as it is currently in Delegated Regulation 604/2014.
Additionally, in line with paragraphs 4, 5 and 6, paragraph 2 should be amended to clarify that only voting members of a committee should be considered.
Para 1 lit (i) “managing outsourcing arrangements of critical or important functions” is not clear for us, there-fore we ask for more information, what EBA means by that.
*Please note that we have responded to question 4 - please see our position paper attached for the response, as there is no question 4 box in this form.
Answer to question 5:
We believe that Paragraph 1b should be deleted. Staff accepted by Article 92.3.c of Directive 2019/878 could be included via the RTS, which doesn’t seem to be the objective of the Directive. This is especially the case when considering entities with a conservative remuneration policy.
We expressly welcome the deletion of the previous quantitative criterion in Article 4 paragraph 1 letter c RTS-MRT. In our view, this criterion had run counter to the upstream identification process, as this criterion would have required that the staff of an institution for the most part, be identified as risk takers. The correction of the effect of the quantitative criterion under Article 4 paragraph 1 letter c RTS-MRT by introducing the option of de-identifying staff members only served to amplify any doubts regarding the expediency of this criterion for the identification of risk takers. Regrettably, the deleted criterion has been replaced by a new criterion that also fails to convince. As per the EBA’s draft, anyone who is paid more than the average remuneration of the “management body in its management function and supervisory function as well as all staff that falls under the definition of senior management in point (9) of paragraph 1 Article 3 of Directive 2013/36/EU” (Article 8) will be deemed to be a risk taker. However, the remuneration of supervisory board members in countries with a dual-board corporate structure is not a compelling criterion. Many small banks only pay their supervisory board members small attendance fees or expense allowances. Furthermore, at larger banks, the emoluments of supervisory board members are generally based on additional criteria, rather than remuneration aspects alone. In corporate groups, the activities on the supervisory boards of subsidiaries are often compensated by way of the remuneration paid for the member’s main activity at the group parent. For these reasons, the results of the remuneration calculation are likely to be highly distorted. Moreover, it is completely unclear how employee representatives on the supervisory board would have to be treated. It would therefore be advisable to delete “supervisory function” from Article 8.
Application date: the application date of the RTS have not to be set before the application date of the CRD V and should therefore be aligned.
With regard to the Question Nr 7/specific provisions that would not be appropriate to be applied to small and non-complex institutions:
The identification of risk-takers in institutions should have the principle of proportionality applied for small and non-complex institutions. After all, if any such banks were facing financial difficulties, this would not automatically destabilise the financial market or jeopardise financial market stability. More specifically, given the size of these institutions, high-risk decisions would, in the vast majority of cases, be taken by the management body. It is, in particular, the granular division and definition associated with quantitative criteria that would not achieve the desired effect at the level of smaller banks, as they lack applicability. First and foremost, it would be the qualitative criteria that are of relevance to smaller banks. However, this gives rise to the question of whether the risk takers de-fined (such as representatives, staff members, etc.) actually pursue any high-risk activities that could potentially compromise the bank’s risk situation and financial stability overall.
Compliance with the principle of proportionality is also enshrined in the CRD. No 66 of the preamble to this Directive provides that remuneration policies should reflect differences between different types of institutions in a proportionate manner, taking into account their size, internal organisation and the nature, scope and complexity of their activities. In line with no 92 of the preamble, this principle of proportionality also applies to any regulatory technical standards adopted under the Directive.
In this context, it should also be noted that, in the interest of proportionality, not all banks should be requested – across the board – to identify risk takers in subsidiaries. For divisional organisations, for example, the inclusion of subsidiaries appears to be of little use. In these cases, it should be examined in light of the structure of the individual institution or corporate group as to whether, and to what extent, subsidiaries should be included in any risk analysis.
In our view, for small and non-complex institutions, the below criteria should be applied:
Due to their low bonuses and the non-complexity of their business identification of the MRTs for small and non-complex institutions (total assets of EUR 5 billion) should be as follows:
(a) all members of the management body
(b) all heads of the institutions control functions
(c) all staff member who's remuneration is equal to or greater than EUR 750 000
All MRTs in small and non-complex institutions would be identified through this criteria. Furthermore, this solution would lead to a harmonized understanding of the rules for all small and non-complex institutions.
Alternatively, the provisions of CRD V would be sufficient for small and non-complex institutions (total assets of EUR 5 billion) for the identification of their MRTs. Due to their low bonuses and their non-complexity of their business the identification of
(a) all members of the management body and senior management;
(b) all heads of the institutions control functions and material business unit;
(c) all staff member who's remuneration is equal to or greater than EUR 500 000 and equal to or greater than the average remuneration awarded to the members of the institution's management body and senior management referred to in point (a) and (i) the staff member performs the professional activity within a material business unit and (ii) the activity is of a kind that has a significant impact on the relevant business unit's risk profile.