On 21 January 2020, the European Central Bank (ECB) published a letter from Andrea Enria, ECB Supervisory Board Chair, to significant institutions supervised under the Single Supervisory Mechanism (SSM) regarding variable remuneration policies. Additionally, the ECB has also published a recommendation (dated 17 January 2020) on dividend distribution policies.
In the letter, the ECB reminds firms that it pays close attention to the remuneration policies of financial institutions under its supervision as such policies may have a significant impact on an institution’s capital base. The ECB underlines the need for institutions to adopt a prudent, forward-looking stance when deciding a remuneration policy and to consider the potentially detrimental impact of the remuneration policy on maintaining a sound capital base, in particular taking into account the transitional requirements set out in the Capital Requirements Directive IV and the transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds pursuant to Article 473a of the Capital Requirements Regulation.
Mr Enria recommends that when institutions make a variable remuneration award (including the use of malus and clawback arrangements) under its remuneration policy they should apply a policy that is consistent with a conservative path towards its fully-loaded capital requirements (including the combined buffer requirement) and outcomes of the supervisory review and evaluation process (SREP).
Furthermore, the ECB expects firms to take into account the potential impact on capital demand due to future changes in the EU’s legal, regulatory and accounting frameworks. In the absence of specific information, the future Pillar 2 requirements and Pillar 2 guidance used in capital planning are expected to be at least as high as the current levels.
On a final note, Mr Enria asks firms to keep their ECB joint supervisory team regularly informed of any decisions regarding their remuneration policy.