On 6 June 2014, the Commission Delegated Regulation N° 604/2014 of 4 March 2014 supplementing the CRD IV was published in the Official Journal of the EU. This Delegated Regulation sets out qualitative and quantitative criteria that should be used by financial institutions when defining the categories of staff whose professional activities have a material impact on the institutions’ risk profiles (the “Identified Staff”).
As a reminder, on 1 January 2014, the CRD IV came into force, including the new rules capping "bankers’ bonuses". The new requirements on remuneration built upon and strengthened the rules already in force under the CRD III and the so-called CEBS Guidelines on Remuneration Policies and Practices published in 2010. They amongst other things restricted variable remuneration to one year's fixed remuneration, or 2x fixed remuneration if there was shareholders’ approval.
In addition, under Article 94(2) of the CRD IV, the European Banking Authority (EBA) was also mandated to “develop draft Regulatory Technical Standards with respect to [...] qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on the institution’s risk profile.”
In this context, the Delegated Regulation that has just been published is based on the draft Regulatory Technical Standards provided by the EBA on 16 December 2013 and adopted by the European Commission on 4 March 2014.
Why a new regulation on Identified Staff ?
In the course of 2012, the EBA conducted a survey aiming at assessing how legislators and supervisors in the various member states had implemented the CEBS Guidelines on Remuneration Policies and Practices in their legislative frameworks, focusing on possible differences between these implementations and the Guidelines and how the requirements of the Guidelines had been supervised in practice, what progress had been made by institutions and which areas needed further development.
Among a certain number of issues identified by the Survey, the EBA concluded that “the numbers of Identified Staff differed considerably between Member States, but there was a clear tendency of institutions to select very low numbers. This affected the core of the CRD III requirements and undermined the effectiveness of EU supervisory reforms on remuneration. […] Many supervisors expressed the need for clear criteria and a process to identify risk takers in a single entity and within groups. […] Further harmonisation of the identification process was essential for a level playing field”.
The new requirements
While the Regulation is made up of 6 articles, the key elements are defined under Article 3 and Article 4
- Article 3 – Qualitative criteria : criteria related to the role, decision-making power and management responsibilities of staff members
||A staff member will be deemed to have a material impact on an institution's risk profile when, amongst other things, he/she is a member of the management body in its management or supervisory function; is a member of the senior management; is responsible and accountable to the management body for the activities of the independent risk management function, compliance function or internal audit function; heads a material business unit; heads a function responsible for legal affairs, finance including taxation and budgeting, human resources, remuneration policy, information technology, or economic analysis; is involved in large credit proposals or products; has the authority to take, approve or veto a decision on certain trading book transactions; has the authority to take approve or veto the introduction of new products, etc.|
- Article 4 – Quantitative criteria: thresholds for the level of total gross remuneration awarded to a staff member in absolute or in relative terms
A staff member will be deemed to have a material impact on an institution's risk profile when he / she
- has been awarded total remuneration of EUR 500 000 or more in the preceding financial year;
- is within the 0.3% of the number of staff who have been awarded the highest total remuneration in the preceding financial year;
- was in the preceding financial year awarded total remuneration that is equal to or greater than the lowest total remuneration awarded in that financial year to a member of senior management or meets one or more of the criteria of Article 3.
It is important to mention that, where a staff member would be identified only under these quantitative criteria but does not, in fact, have a material impact on the institution’s risk profile, it is possible to exclude him/her from the list of Identified Staff. This exclusion is however subject to a strict risk assessment (taking into account the qualitative criteria mentioned under Article 3) and a notification or prior approval (depending on the amount of total remuneration) to the competent authority responsible for prudential supervision.
This Delegated Regulation will enter into force on the 20th day following that of its publication in the Official Journal of the European Union and will be binding and directly applicable in all Member States.