EBA CRD4 remuneration guidelines propose extension of the bankers' bonus cap

The EBA's long-awaited draft guidelines on remuneration policies (120-page / 1.4MB PDF) seek to clarify how firms and national regulators should interpret and apply the remuneration rules in the latest version of the EU's Capital Requirements Directive (CRD4). The guidelines follows on from the EBA opinion issued in October last year, when it stated that most RBAs used by banks should be treated as 'variable' rather than 'fixed' remuneration, with the result that many firms would be in breach of the ratios between fixed and variable pay set out in the directive.

The draft guidelines are open for public consultation for three months. The EBA has stated that it expects national regulators to implement its final rules by the end of 2015 "so as to ensure that all institutions apply them for the performance year 2016 and onwards".

Some banks have increasingly been incorporating RBAs, linked to the seniority and level of responsibility of their employees, into staff remuneration packages since the introduction of EU rules on bankers' bonuses. In a non-binding opinion in October, the EBS said that these payments were in effect bonuses and were wrongly being used by banks to get around the rules.

The guidelines state that the rules should be applied to staff at all institutions regardless of size, in line with a "legal reading" of CRD4, which introduced new rules on deferral and payment in instruments at the start of 2014. This would prevent national regulators from exempting smaller, less complex banks from the requirements, as is currently the case in several member states including the UK. However, it intends to recommend that the European Commission introduce specific exemptions for "certain institutions that do not rely extensively on variable remuneration" through changes to the law.

CRD4 requires banks to limit bonuses and other forms of variable pay to 100% of a banker's fixed remuneration, or salary, in any given year. This can be increased to 200% of fixed remuneration with the agreement of shareholders. The UK, which has the largest financial services sector in the EU, has opposed the introduction of a bonus cap since it was first proposed, even going so far as to lodge a now-abandoned legal challenge to the policy at the Court of Justice of the European Union (CJEU). The cap came into force on 1 January 2015.

The draft guidelines reiterate and formalise this point, stating that CRD4 does not provide for a "third category" of remuneration. They then go on to set out criteria for whether particular aspects of remuneration should be classed as fixed or variable. Correct categorisation is "crucial for the calculation of the ratio between the variable and the fixed component and to safeguard that the limitation of this ratio is complied with", the EBA said.

Depending on the outcome of the consultation, the EBA will expect national regulators to implement the new guidelines on a 'comply or explain' basis for remuneration packages from 2016 onwards. National regulators would have two months to inform the EBA of their compliance, or to explain why they have not complied or only partially complied. If the EBA is not satisfied with the regulator's explanation, it can refer that regulator to the CJEU.

Financial services employment specialist Steven Cochrane of Pinsent Masons, the law firm behind Out-Law.com, said that the guidelines take "an extremely black letter approach to CRD4" and do not "account for practical nuances".

"There appears to be a complete lack of pragmatism which will be of particular concern to firms already subject to the cap and those firms currently exempt on proportionality grounds," he said.

"The most surprising and indeed concerning aspect is the EBA's view on proportionality exemptions. To date UK regulators have operated a proportionality threshold such that the bonus cap does not apply to smaller firms or firms whose operations are relatively simply and non systemic. The EBA is challenging the legality of this and saying that the bonus cap rules should apply across the board to all credit firms and their subsidiaries. The effect here could be enormous, casting the net much wider so as to catch smaller banks, insurers and asset management firms. The net effect could be that thousands of employees not currently captured by the rules could have their variable pay subject to scrutiny and fierce regulation," he said.

"It will be very interesting to see what comes out of the consultation and how much resistance is put up by the UK regulator. Ultimately, the only way to compel countries to comply with any final say on this would be for the European Commission to take legal action against national regulators for breaching their legal obligations under EU law. This is arguably unlikely. The finance minister has already indicated that the UK regulators would exercise a degree of flexibility in terms of final implementation saying that it is for them to 'decide how and to what extent the EBA's final guidelines are incorporated into Britain's existing rules on bankers' pay'," he said.