The European Commission adopted regulatory standards identifying material risk takers at financial institutions and investment firms who will be subject to caps on bonuses and other compensation regulations. The application of standard quantitative and qualitative criteria could lead to the inclusion of additional staff in the category of material risk taker. The standards were proposed by the European Banking Authority and have now been endorsed by the Commission.
Commissioner for the Internal Market Michel Barnier said that the adoption of the standards is an important step towards ensuring that the capital requirement rules on remuneration are applied consistently across the E.U. The standards are designed to provide clarity on who new E.U. rules on bonuses actually apply to, which is the key to preventing circumvention. In addition, the European Banking Authority has a mandate to ensure consistent supervisory practices on remuneration rules among competent authorities. Commissioner Barnier pledged that the Commission will remain vigilant to ensure that the new rules are applied in full.
There is a rebuttable presumption that staff at financial firms are material risk takers if their total remuneration exceeds € 500 000 per year, or they are included in the 0.3% of staff with the highest remuneration in the financial firm, or their remuneration is equal or greater than the lowest total remuneration of senior management and other risk takers. The presumption can be rebutted under only very strict conditions. For staff members with a total remuneration of €500 000 or more, any rebuttal of the presumption that the member of staff is a material risk taker needs to be notified to the competent authority. For staff with a total remuneration of €750 000 or more, or for staff included in the 0.3% of the highest earners, prior approval from the competent authorities is required. For staff with a total remuneration of €1 000 000 or more, competent authorities must inform the EBA of any intended approval before the decision is made. In each case, the burden of proof will rest squarely on the financial firms to demonstrate that, despite the very high remuneration, the staff member in question does not in fact have any material impact on the firm’s risk profile, on the basis of the business unit they are working in, as well as of their duties and activities.
In addition to staff identified as material risk takers under the absolute quantitative standards, staff at financial institutions and investment firms must be identified as having a material impact on the firm’s risk profile if they meet one or more of the 15 qualitative criteria set out in the technical standards related to the role and decision-making power of staff members, such whether they are a member of the firm’s management body, a senior manager, or the staff member accountable to the management body for the activities of the firm’s independent risk management function, compliance function or internal audit function. Two other of the 15 qualitative criteria are whether the staff member heads a material business unit or has managerial responsibility in a material business unit and reports directly to the staff member who heads that unit. Another criteria is whether the staff member heads a function responsible for legal affairs, finance including taxation and budgeting, human resources, remuneration policy, information technology, or economic analysis.
The standards were adopted under the Capital Requirements Directive (CRD IV), which entered into force on July 17, 2013 and which strengthened the rules regarding the relationship between the variable component of total remuneration, such as bonuses, and the fixed component, such as salary. Beginning January 1, 2014, the variable component cannot exceed 100% of the fixed component of the total remuneration of material risk takers. Under certain conditions, shareholders can increase this maximum ratio to 200%.