Why has the Commission adopted a Delegated Regulation on criteria to identify material risk takers?
Articles 92 to 94 of the Capital Requirements Directive IV (CRD IV) contain detailed requirements in relation to the remuneration policies of credit institutions and investment firms (jointly referred to as “institutions”), to the structure of the remuneration awarded by them and in particular to its variable elements. In general these requirements apply to all staff whose professional activities have a material impact on the risk profile of the institution concerned.
In order to ensure an effective and consistent approach by all competent authorities and institutions across the EU to the identification of staff falling within this category, Article 94(2) of CRD IV mandated the European Banking Authority (EBA) to develop regulatory technical standards (“RTS”) with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile (“Identified Staff”); and delegated to the Commission the power to adopt them. The EBA submitted its draft RTS to the Commission on 16 December 2013.
When will the Delegated Regulation (RTS on Identified Staff) enter into force?
The Commission adopted the Delegated Regulation with regard to RTS on Identified Staff on 4 March 2014 (IP/14/210), without modifying in substance the draft submitted by the EBA. Following the expiry of the scrutiny period for the European Parliament and the Council, the Regulation was published in the Official Journal on 6 June 2014 (OJ L 167). Pursuant to its Article 6, it enters into force today, 26 June 2014.
The Regulation will be binding in its entirety and directly applicable in all Member States, without any further implementation being required. All competent authorities and institutions shall apply the terms of the Regulation from 26 June 2014 onwards, in addition to the national legislation implementing CRD IV.
2. Key Elements
Which members of staff will be identified as material risk takers?
As a general principle, staff shall be identified as having a material impact on the institution's risk profile if they meet one or more of the criteria set out in the technical standards.
First, the Regulation contains a set of 15 standard qualitative criteria which are related to the role and decision-making power of staff members. For example, considering that (both executive and non-executive) members of the management body have ultimate responsibility for the institution, its strategy and activities, they are considered to always have a material impact on the institution’s risk profile. In addition, the risks taken by the business and the way they are managed are the most important factors for the institution’s risk profile. Therefore, senior management and staff responsible for material business units, taking credit risk and market risk exposures above specified limits, the management of specific risk categories such as liquidity, operational or interest rate risk, and for control functions within an institution are also considered to be material risk takers. Other examples of material risk takers include staff responsible for providing internal support who are crucial to the operation of the business and have authority to take decisions which expose the institution to material operational and other risks.
Second, the Regulation contains three additional quantitative criteria which are based on the total remuneration which members of staff receive, both in absolute terms and relative to other members of staff within the same institution. Indeed, where a member of staff is awarded total remuneration which exceeds an appropriate threshold, it is reasonable to presume that the staff member makes a material contribution to the institution’s business objectives and has a material impact on the institution’s risk profile. Therefore, staff not identified by any of the qualitative criteria should still be identified as material risk takers if:
their total remuneration exceeds € 500 000 per year; or
they are part of the 0.3% of staff with the highest remuneration in the institution, or
their total remuneration is equal to or greater than the lowest total remuneration of senior management or of any other risk taker in the institution (excluding control and support functions and non-executive board members).
Can members of staff who meet one or more of the criteria nonetheless claim that, in fact, they are not material risk takers?
Staff members who meet one or more of the 15 standard qualitative criteria are definitively identified as material risk takers. This is because the qualitative criteria are linked to their specific roles and decision-making power.
However, for staff members who are not identified by virtue of the qualitative criteria but only by one or more of the additional three quantitative criteria, the Regulation provides for a limited possibility to rebut the presumption as to their material impact on the risk profile of the institution. The Regulation, however, provides for a robust framework to ensure that any such rebuttal is subject to proper supervisory control and review.
For members of staff earning between €500 000 and €750 000, institutions are required to notify to the competent authority all cases where the presumption is rebutted.
For members of staff earning more than €750 000, or for the members of staff who are part of the 0.3% of the highest earners in the institution, the presumption can be reversed only where the competent authority has granted prior approval.
Above €1 000 000, where in exceptional cases an exclusion might be requested, the EBA will ensure a consistent application of these provisions.
What is the role of the competent authority responsible for the supervision of the institutions?
The Regulation lays down criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile and supplements the substantive rules and principles as well as the powers and responsibilities of the competent authorities which are provided for under CRD IV.
Competent authorities should ensure that institutions maintain a record of the assessment made and of the staff whose professional activities have been identified as having a material impact on their risk profile to enable the competent authority and auditors to review the assessment. The documentation should also include information on members of staff that have been identified solely under the quantitative criteria but for whom the professional activities are assessed as not having a material impact on the institution’s risk profile.
The competent authority’s responsibility for ensuring due supervisory oversight requires it to use all its powers in order to intervene promptly and effectively in the event that the institution's use of the possibility to rebut the presumption laid down in the Regulation is shown to be excessive, unjustified or doubtful. To ensure that the competent authority can exercise appropriate and effective prudential supervision, all notifications provided for under the Regulation should occur promptly and in advance of awarding any remuneration whose conformity with the CRD IV rules on remuneration is dependent on the notified decision.
Does the RTS on Identified Staff contain an exhaustive set of criteria? What about material risk takers not identified by the criteria in the Regulation?
No, the Regulation does not contain an exhaustive set of criteria. The framework for prudential supervision established by CRD IV requires that all institutions identify all members of staff whose professional activities have a material impact on the institution’s risk profile. In addition to applying the binding criteria laid down in the Regulation, institutions should use any other criteria that they consider warranted to ensure that all staff having a material impact on the institution’s particular risk profile are identified, based on their authority and responsibilities and the institution’s risk and performance indicators, its internal organisation and the nature, scope and complexity of its activities. The criteria should fully reflect all risks to which the institution or group is or may be exposed.
3. Next Steps
Is the regulatory reform of remuneration policies now complete?
CRD IV provides for two delegated acts to be adopted by the Commission in the area of remuneration and governance, both of which are now in place:
On 4 March 2014, the Commission adopted the Delegated Regulation with regard to RTS on Identified Staff which is the subject matter of this memo.
On 12 March 2014, the Commission adopted Delegated Regulation No 527/2014 with regard to regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of an institution as a going concern and are appropriate to be used for the purposes of variable remuneration.