The European Banking Authority (EBA) has published an exchange of letters between itself and the European Commission (the Commission) concerning the interpretation of the proportionality principle contained in Article 92(2) of the Capital Requirements Directive IV (CRD IV) which concerns remuneration policies.

In its letter to the Commission the EBA refers to a Board of Supervisors meeting on 10 and 11 December 2014, at which different interpretations on the application of the proportionality principle were discussed. It notes that a strong majority of the members of the Board interpreted the wording of Article 92(2), in light of recital 66, in a way that allows small and non-complex institutions to partially or fully waive certain CRD IV remuneration provisions. Those provisions would be points (l), (m) and (n) of Article 94(1) of the CRD IV. However, the EBA’s legal view is that given that the CRD IV remuneration principles themselves must be considered proportionate, in the absence of any clear provision in the enacting terms of the CRD IV, a waiver of the application of even a limited set of remuneration principles for smaller and non-complex institutions, when their risk profile allows, would not be in line with the CRD IV.

In its reply the Commission states that Articles 92 and 94 apply to all institutions, without any distinction. It further states that Article 92(2) clarifies in this context that competent authorities shall ensure that institutions comply with these principles in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities.

The Commission states that this means that each of the relevant provisions has to be applied to each institution, while any discretion those provisions may leave to Member States and competent authorities has to be exercised notably in compliance with the principle of proportionality. The Commission adds that this is what Article 92(2) means when it stipulates that the “principles” referred to must be applied in a manner and to the extent that is appropriate.

The Commission goes on to say that by contrast, general principles as implicitly referred to in the introductory part of Article 92(2) can in no way justify the non-application of one or the other rule contained in that provision, or indeed in Article 94(1). This applies in particular to the provisions identified in the EBA’s letter, namely points (l), (m) and (n) of Article 94(1), which regulate deferral of variable remuneration, pay-out in instruments and the application of malus. The Commission states that such provisions “lay down clear rules and leave no room for exceptions or exemptions.”

The letters pre-date the EBA’s consultation on draft guidelines on sound remuneration policies which was published in March 2015. The consultation closes on 4 June 2015. Once the guidelines are finalised Member State regulators will be expected to implement them by the end of this year to ensure that institutions apply them for the 2016 performance year and beyond.

View European Banking Authority letter to European Commission concerning the interpretation of Article 92(2) of the CRD IV – remuneration policies, 8 January 2015

View European Commission letter to European Banking Authority concerning the interpretation of Article 92(2) of the CRD IV – remuneration policies, 23 February 2015