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This briefing focuses on recent announcements by the EBA which are particularly relevant to investment firms. However, it also includes a summary of new guidance from HMRC (at the end of the briefing) which will be of interest to most general reward specialists. 

EBA issues roadmap and consults on remuneration requirements under IFD and IFR

Late last year new EU legislation was published setting out a new prudential framework for investment firms (e.g. stockbrokers, investment managers/ advisers, custodians, etc.). This new regime will be delivered via the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR) which are due to come into force in June 2021. The new prudential regime has been introduced in recognition that the risks faced by investment firms are often different to credit institutions.

Summary of the new remuneration requirements under IFD/ IFR

In summary the new regime splits investment firms into 3 broad categories as follows:

  • Class 1: Large and systemically important firms that will remain subject to the CRD/CRR remuneration regime.
  • Class 2: Large and interconnected firms that will be subject to the new IFD remuneration regime in full (summarised below).
  • Class 3: Small and non-interconnected investment firms will not be subject to the new IFD remuneration regime (but will remain subject to remuneration requirements under MiFID II).

Many of the remuneration requirements under IFD are similar to those that currently apply to UK investment firms (e.g. under the BIPRU remuneration code). However, the proportionality rules are narrower under IFD which means that firms will have limited scope to disapply key requirements such as deferral or pay-out of variable remuneration in shares/ instruments. The main remuneration requirements under IFD are as follows:

  • Firms must establish a remuneration committee to oversee remuneration policy.
  • Ratio to be set (and justified) between fixed and variable remuneration.
  • At least 40% of variable remuneration has to be deferred over a three to five year period (and up to 60% for “particularly high” amounts).
  • At least 50% of any variable remuneration has to be paid in shares or acceptable instruments (subject to an appropriate retention policy).
  • Inclusion of malus and clawback provisions.
  • No guaranteed bonuses (except for staff in first year after recruitment).
  • Limited ability to disapply provisions on the basis of ‘proportionality’ (e.g. firm’s average balance sheet must be under €100m and the individual’s variable remuneration must not exceed €50,000 or exceed 25% of total annual remuneration).

Roadmap

Last week the European Banking Authority (EBA) published a roadmap for implementation of the IFD and IFR, as well as a number of related consultations. The roadmap outlines the approach the EBA intends to take, as well as expected timeframes, as it begins to deliver the work that was mandated to it under IFD/IFR.

With respect to remuneration-related deliverables, the indicative timings given by the EBA are as follows:

  • October 2020: Regulatory technical standards (RTS) to specify appropriate criteria to identify ‘material risk takers’ and instruments awarded as variable remuneration (see further below).
  • First quarter of 2021: Guidelines to specify the content of the application of governance arrangements; benchmarking of remuneration practices and the gender pay gap; and application of sound remuneration policies.
  • Last quarter of 2021: EBA to publish supervisory information on high earners (including guidelines to facilitate data collection).

The new regulatory framework introduces several ‘classes’ of investment firm, which means that smaller, less interconnected firms, should have a lower regulatory burden and, therefore, lower compliance costs but that larger firms will be regulated more akin to current requirements for banks under CRD IV. In its announcement of the publication of the roadmap, the EBA emphasised that it “will ensure a proportionate implementation of this new framework to take account of the different classes of investments firms”.

FIT comment:

It remains to be seen whether the UK will be required to implement IFD/IFR. The new EU regime is due to come into force in June 2021; this would be after the end of the Brexit transition period (as at the time of writing) which would mean the UK would not be required to implement the rules.

The FCA has announced that it will be publishing a discussion paper this summer for the ‘Investment Firms Prudential Regime’ (although it is not clear if this refers to the EU regime or a new UK-specific regime). We also note that the latest FCA Business Plan indicated that it intends to "introduce a more risk-sensitive prudential regime for investment firms in 2021". 

The net result is that it is currently difficult to say with any certainty what the regulatory framework for UK investments firms will be this time next year. Most legal commentators consider it unlikely that the UK government will move drastically away from the substance of IFD/IFR so the approach adopted by the EBA is likely to ‘set the tone’ for UK regulatory implementation.

 

Remuneration-related consultations

In addition to the publication of the roadmap, the EBA has also published a number of consultations, including two related to remuneration, as summarised below. Each of the consultations will be open for comment until September 2020, and the EBA has indicated that it will issue the final RTS in October 2020.

(a) Criteria for the identification of “material risk takers”:

The EBA has been mandated to “develop draft regulatory technical standards to specify appropriate criteria to identify the categories of individuals whose professional activities have a material impact on the investment firm's risk profile” (also known as ‘material risk takers’).

The principal aim of the draft RTS is to harmonise the criteria for the identification of material risk takers and ensure a consistent approach across the EU. The proposed criteria contained within the draft RTS are a combination of qualitative and quantitative criteria (i.e. broadly the same approach that is used under the CRD regime).

There are various qualitative criteria for the identification of a material risk taker, including where the individual:

  • is a member of senior management or the management body
  • has managerial responsibility for a business until which contributes over 10-20%* of the firm’s total own funds requirement (* this value is subject to consultation)
  • has managerial responsibility for a control function or money laundering/ terrorist financing function
  • has managerial responsibility for a material risk area (e.g. execution of client orders, trading activities, etc.)
  • has approval/ veto powers for new products

The quantitative criteria have been drafted on the presumption that “the staff with a high level of total remuneration has a higher impact on the risk profile or asset it manages compared to staff with significantly lower remuneration levels”. This means a member of staff will be presumed to be a material risk taker if any of the quantitative criteria are met, including where:

  • the individual that receives total remuneration greater than €500,000 and higher than the average remuneration of members of the management body and senior management
  • the individual that receives total remuneration greater than €750,000 (irrespective of how it compares to the pay of other staff)
  • for firms with over 1,000 staff, any individual who is within the 0.3% of staff who have been awarded the highest total remuneration
  • the individual is paid more than staff identified under some of the qualitative criteria (e.g. senior management, head of a material business unit, etc.)

A firm has the ability to override the presumption under the quantitative criteria if it considers that the individual does not, in fact, have a material impact on the investment firm's risk profile. However, the exclusion of ‘deemed’ staff will need to be justified and will be subject to supervisory review. In particular, if the staff member received pay greater than €1,000,000 it will require approval from the competent authority which shall only be given “in exceptional circumstances”.

(b) Pay-outs in instruments for variable remuneration

The EBA has also published draft RTS which set out the characteristics of instruments (classes of additional tier 1, tier 2 and other instruments) that are appropriate to be used for variable remuneration under the IFD. In setting the standards for these instruments the EBA has started with the well-established approach used under CRD, whilst also recognising “the need for increased flexibility of investment firms”.

There are detailed requirements for each potential type of instrument but, in summary, the approach of the EBA is to set out a framework that: 

  • permits receipt of variable remuneration paid in instruments that promote sound and effective risk management, as well as providing incentives for staff to act in the long-term interests of the investment firm (including its various stakeholders)
  • requires that the price or value of those instruments awarded as variable remuneration should reflect changes in the credit quality of the firm as a going concern (e.g. participation in losses)
  • include appropriate mechanisms to ensure that the instruments are written down or converted before an investment firm fails to meet its own funds requirements
  • includes a trigger level for conversion (to Common Equity Tier 1 instruments) or write-off which is set above the regulatory minimum requirements (7% CET 1) to ensure that the instruments are suitable for the purposes of variable remuneration
  • caps and limits may apply to distributions payable on the instruments
  • where alternative arrangements are to be used they will be subject to the approval of the competent authority

It is assumed that institutions will have to comply with the RTS with regard to the remuneration awarded for the performance year 2021.

FIT comment:

The approach taken regarding material risk takers and pay-out instruments has been developed by reference to the approach taken under CRD and will therefore be familiar to many reward specialists working at or with FS firms. Indeed, this approach is consistent with comments made in the EBA roadmap that it wants to ensure “cross-sectoral consistency between the governance and remuneration framework under the IFD and the CRD”. 

For example, the qualitative and quantitative criteria for identification of material risk takers are similar (but not the same) as those specified for credit institutions under the CRD regime. However, there are differences to take note, e.g. the absolute thresholds used for identification of MRTs are not the same under IFD and will potentially take some individuals out of scope of the remuneration provisions contained within IFD/ IFR.

We would be happy to provide further detail and analysis for interested clients.

 

New HMRC guidance regarding coronavirus and tax-advantaged share schemes

HMRC has announced this week that it will allow participants to postpone contributions to SAYE schemes for more than 12 months (the current maximum) where the additional months are missed due to coronavirus (e.g. due to being furloughed or on unpaid leave). As normal, any missed payments will delay maturity of the options. There is no need to issue new documentation for saving contracts that started before 10 June 2020 (the announced changes will still take effect).

In addition, HMRC has also confirmed that:

  • any employees that have been furloughed and are being funded via the Coronavirus Job Retention Scheme (CJRS) can continue to make SAYE contributions
  • SAYE contributions can be made by standing order rather than by deduction from salary (e.g. if an employee is on unpaid leave)
  • CJRS payments may count as salary, which means that employees who have been furloughed can continue to make SIP partnership contributions from their CJRS payments
  • if employees or full time directors were granted CSOP options (before coronavirus) but are now furloughed because of coronavirus, those options will still qualify on the basis they were employees/ full time directors at the time of grant

As we noted last month, the deadline for the filing of companies’ HMRC annual share scheme returns for the 2019/20 tax year is approaching on 6 July 2020. HMRC has said there will not be an extension of the filing deadline, but if a company has to delay filing because of coronavirus, HMRC will consider this under the reasonable excuse rules.

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com.

 

Rory Cray
rory.cray@fit-rem.com
020 7034 1116

Darrell Hare
darrell.hare@fit-rem.com
020 7034 1113

Matt Higgins
matt.higgins@fit-rem.com
020 7034 1117 

John Lee
john.lee@fit-rem.com
020 7034 1110

Sahul Patel
sahul.patel@fit-rem.com
020 7034 1778

Iain Scott
iain.scott@fit-rem.com
020 7034 1114

Katharine Turner
katharine.turner@fit-rem.com
020 7034 1115
 

 

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

 

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