The European Banking Authority (EBA) issued a consultation paper on 21 May 2013 setting out how to define "Identified Staff" (Code Staff in the UK). Identified Staff are categories of staff who have a material impact on the risk profile of the firm and as a result are subject to the CRD IV remuneration requirements including the variable pay cap of 1x fixed pay (or 2x fixed pay with shareholder approval).
An EBA survey published in April 2012 found that the numbers of Identified Staff and practices used as part of the identification process varied significantly between EU Member States. The draft regulatory technical standard on the definition of Identified Staff intends to 'ensure an appropriate harmonisation and level playing field across the EU'.
The draft proposals set out the following expanded criteria:
- Regulatory Qualitative
- Regulatory Quantitative
Staff will be within scope of the CRD IV remuneration provisions if they fall within any of these three criteria. The consultation process will close on 21 August 2013 with the final standard coming into effect in 2014 ahead of the 2014/15 bonus round.
The result of this expanded criteria will be a significant increase to the number of Identified Staff and therefore staff subject to remuneration requirements. Some industry commentators are predicting that this may lead to UK firm's having to multiply their Code Staff population by as much as ten.
New EBA proposals
The proposed identification process is based on a combination of internal criteria and other regulatory qualitative and quantitative criteria.
The three sets of criteria should be applied to all staff at group level and subsidiary level (including branches and subsidiaries located outside of the EU) to ensure a consistent firm-wide approach for determining Identified Staff subject to the CRD IV provisions. For firms which are not credit institutions (i.e. asset management subsidiaries of credit institutions) the criteria will need to be applied at group level.
When developing internal criteria, firms should take into account:
- The size and internal organisation of the firm
- The nature, scope and complexity of the firm's activities
- The extent to which the professional activities of the staff member could impact the firm's annual results or balance sheet.
When determining the risk profile of the firm consideration must be given to all of the credit risk, market risk, interest rate risk, operational risk, reputation risk and liquidity risk the firm is or could be exposed to.
Regulatory Qualitative criteria
The EBA has proposed criteria to identify staff whose roles are inherently linked to the risk profile of the firm. The following staff must be automatically identified:
- Members of the management body and senior management
- Staff responsible and accountable for the internal risk control function, the compliance function or the internal audit functions
- A staff member within a group who heads up a separate organisational or legal entity, business line or geographical location
- Heads of legal, tax, HR, IT, budgeting, economic analysis or business continuity planning
- A staff member with managerial responsibility for staff identified under the Internal criteria
- A staff member whom (individually or collectively) has decision making power over product governance
- Any staff member (e.g. trader) whom (individually or collectively at a trading desk level) has authority to action transactions or exposures, or to take, approve or veto a decision with a commitment tantamount to 0.25% of the firm's Tier 1 capital or above (in certain circumstances an internal model approach can be used to assess the commitment threshold).
Regulatory Quantitative criteria
A staff member whose remuneration package satisfies any of the following proposed criteria will be deemed to be Identified Staff:
- Total gross remuneration is €500,000 or more in either of the two preceding financial years.
- Total gross remuneration places them within the top 0.3% of staff according to the highest total gross remuneration received in either this or the previous financial year.
- Variable remuneration that could be above €75,000 and over 75% of fixed pay in any given year in accordance with the remuneration policy of the firm.
- Total gross remuneration in either this or the previous financial year that is equal to or greater than the lowest total remuneration awarded in that year to a professional staff member of the same entity whom is either a member of senior management or whom would be categorised as Identified Staff under either the regulatory qualitative or internal criteria.
Note: Remuneration is valued as at the date of award so any future reductions made via clawback, malus or otherwise are not taken into account. The discount rate (as of yet unknown) that is to be applied to the long term (5 years or more) deferral award paid in instruments is also not taken into account.
The potential to exclude staff
If an individual is deemed to be Identified Staff due to either point (3) or (4) above they can then be excluded from the definition if each of the following conditions is met:
- They have not met the internal criteria; and
- The absolute amount of variable remuneration which could be awarded to the individual, their authorities, duties and the differences between the levels of remuneration that could be awarded to the individual in the other jurisdictions the firm operates means the individual does not have a material impact on the risk profile.
Next steps for firms
The consultation period for these draft proposals expires on 21 August 2013 with the revised standard to be prepared for consideration by the European Commission this autumn. EU regulators will then have three months to comment on the revised standard before they are adopted by the Commission and can take effect next year.
Although this is at the consultation stage, with CRD IV due to take effect in only six months time the impact on remuneration policy, governance, systems and disclosure due to increased Identified Staff numbers is potentially significant.
Firms should consider undertaking an identification exercise based on the expanded criteria to determine the potential impact on their Identified Staff population:
- A robust methodology will need to be developed setting out rationale for the Identified Staff criteria
- A detailed process should be designed with a description of the information required to carry out the assessments against each set of criteria
- Clear roles and responsibilities should be set out showing who is responsible within the control functions and the business for conducting the assessment process
- Once roles have been assessed and either selected or de-selected as Identified Staff, a gap analysis of their current remuneration structures against the CRD IV remuneration requirements can be completed
As part of their overall CRD IV strategy, firms should also be assessing the interaction (if any) with other future remuneration regulation (e.g. AIFMD, UCITS V).