The Capital Requirements Directive IV (CRD IV) contains remuneration requirements that aim to ensure that remuneration policies are consistent with and promote sound and effective risk management, do not provide incentives for excessive risk taking and are aligned with the long-term interests of the institutions across the EU. The FCA implemented the CRD IV remuneration requirements in SYSC 19A and SYSC 19D of the FCA Handbook.
In December 2015 the European Banking Authority (EBA) published guidelines setting out its view on how the CRD IV remuneration rules should be applied, and sought to enhance the consistency of their application to ensure a level playing field amongst institutions (the EBA Remuneration Guidelines). The FCA (and the PRA) notified the EBA that it would comply with the EBA Remuneration Guidelines, except for the provision that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval (the bonus cap), must be applied to all firms subject to the CRD IV.
In September 2016, the FCA published Consultation Paper 16/28: Remuneration in CRD IV firms: new guidance and changes to Handbook (CP16/28) in order to consult on changes to its Handbook rules and guidance to incorporate the EBA Remuneration Guidelines. The consultation affected all firms that fall within the scope of the CRD IV, namely banks, building societies, investment firms and overseas firms, who are required to comply with the FCA’s Remuneration Code under SYSC 19A, SYSC 19C or SYSC 19D.
The FCA has now published Policy Statement 17/10: Remuneration in CRD IV firms: final guidance and changes to Handbook (PS17/10). In PS17/10 the FCA sets out final rules and guidance that make changes to the FCA Handbook rules and guidance to incorporate the EBA Remuneration Guidelines. The FCA also provides feedback to the comments received to CP16/28. Such feedback includes the following comments:
- the FCA agrees that ‘retention awards’ are different from guaranteed variable remuneration. In order to make this clear and remove any potential for different interpretations, the FCA has edited the relevant sub-headings in SYSC 19A and 19D to explicitly include the term ‘retention awards’;
- when establishing a remuneration committee, the EBA Remuneration Guidelines set out that the ‘significant’ subsidiary test must be carried out on a standalone entity basis. The FCA has set out its interpretation of significance for these purposes under Question 4 of its updated FAQs on Remuneration Codes (SYSC 19A and 19D). Broadly, this encompasses significant IFPRU firms, or institutions referred to in Article 131 of the CRD IV. This is different to the proportionality test under the FCA’s General Guidance on Proportionality, so from its perspective the FCA would only expect a firm to have a remuneration committee on a standalone basis where they meet the additional criteria for ‘significance’ set out in Question 4. Where a firm is dual regulated, they will also need to consider the significance criteria established by the PRA; and
- in relation to long-term incentive plans (LTIPs), under SYSC 19A and 19D, firms are required to ensure that all variable remuneration is based on an assessment of financial and non-financial performance of the individual, business unit and the firm as a whole. The FCA would expect to see individual performance considered both at the point of granting the award, and in the period prior to vesting, irrespective of whether the future performance measures are linked to firm level or division targets and measures. This is in addition to any ex-post adjustment to reflect a specific crystallised risk or adverse performance outcome.
The EBA Remuneration Guidelines came into force on 1 January 2017 and are directly addressed to firms within scope of the CRD IV. Such firms should ensure that they comply with the EBA Remuneration Guidelines for the 2017 performance year onwards, as well as the new rules and guidance that take effect upon the publication of PS17/10.
View PS17/10: Remuneration in CRD IV firms, 3 May 2017