Over two years since the European Union (EU) adopted new rules on remuneration via CRD IV, credit institutions and investment firms are now preparing for their application. However, while the legislative intent seems to have been some level of proportionality to the new rules, questions still remain about whether this can actually be achieved. Can certain provisions be disapplied to low risk institutions, or must they comply with all of the Directive?
This issue has been rumbling on for some time. In January 2015 the European Banking Authority (EBA) expressed concern to the European Commission (Commission) that even a limited set of remuneration principles for smaller and non-complex institutions would not be in line with CRD IV – however sensible this would seem from a policy perspective. The EBA asked the Commission for advice on the guidelines that are expected to be published shortly. For its part, the Commission explained that the proportionality referred to in Articles 92 and 94 CRD IV should only apply to enforcement at the national level – not to the requirements themselves. The result is the application of all remuneration rules to all firms in scope.
The European Securities and Markets Authority (ESMA) has, however, taken a different approach. Its draft guidelines on remuneration for mutual funds (UCITS V) are intended to be aligned with the existing rules for alternative investment managers and allow for the disapplication of certain provisions. ESMA justifies this divergence on the basis of slightly different wording in the main legislative texts and the different nature of the asset management industry. The UK FCA (also currently consulting on draft rules for fund managers) is adopting ESMA’s approach. But this will be of little comfort to institutions that must apply more than one set of rules to their employees.
The lack of harmonisation is causing concern. The chair of the EBA, Andrea Enria, took the opportunity of his yearly hearing with the European Parliament to call for changes to CRD IV to allow for sharper proportionality. With the review of the Directive due by end June 2016, the ball is now in the Commission’s court. It is clear though, that any changes will not be in place before 2016 when the first rules – those for credit institutions and investment firms – apply.