Shearman & Sterling LLP | Financial Regulatory Developments Focus
Financial Regulatory Developments Focus
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The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.

  • UK Regulator Highlights Role of Remuneration Committee Chair As a Senior Manager
    11/01/2018

    The U.K. Financial Conduct Authority has published a letter (dated August 20, 2018) addressed to the Chair of the Remuneration Committee of banks and large investment firms (investment firms with total assets over £50 billion). The letter informs the Chair of how the FCA intends to assess the remuneration policies and practices of firms in 2018/19. Moreover, it sets out the impact of that approach for the Chair of the Remuneration Committee as a Senior Manager under the Senior Managers and Certification Regimes. The Chair of the Remuneration Committee of in-scope firms holds FCA Senior Manager Function 12. The FCA notes that its supervisors will be interacting with the Chair of the Remuneration Committee to ascertain how the Chair has determined that their firm's policies and practices promote the right behavior. The discussions will include an assessment of how any issues from the 2017/18 remuneration round have been addressed. The FCA also highlights that a Chair of the Remuneration Committee should be satisfied that the level of ex post adjustments are appropriate and be capable of providing reasons for these adjustments. In addition, the FCA is adopting the same approach as the Prudential Regulation Authority and will no longer provide a non-objection statement to the proposed communication or distribution of variable remuneration awards by banks and large investment firms.

    View the letter.

    View details of the PRA's approach to the latest remuneration round.
  • UK Prudential Regulator Issues Update to Level One Firms on Supervising Remuneration Compliance
    10/18/2018

    The U.K. Prudential Regulation Authority has published a "Dear Remuneration Committee Chair" letter that it has sent to Remuneration Committee Chairs of proportionality Level One firms (that is, banks, building societies and PRA-designated investment firms with relevant total assets exceeding £50 billion as at the relevant date) ahead of its annual review of remuneration policies and practices.

    In the letter, the PRA explains that, with effect from the 2018/19 remuneration review, the PRA will no longer provide a non-objection statement to the proposed communication or distribution of variable remuneration awards by Level One firms. The PRA states that its oversight of Level One firms' remuneration practices will increasingly draw on the principles for governance set out in the Senior Managers and Certification Regime, placing more emphasis on how the Chairs of firms Remuneration Committees discharge their responsibilities under the SM&CR and on how Remuneration Committees carry out their role of oversight and independent challenge under the PRA's Remuneration Rules.

    Going forward, Level One firms can continue to expect engagement throughout the year from their PRA supervisors on their remuneration policies, practices and processes and, where needed, feedback on issues the firm should address. Level One firms should submit a remuneration policy statement and quantitative data tables three months ahead of the firm's preferred final feedback date (that is, the date previously referred to as the "non-objection date"), and an update to the figures at least two weeks before the final feedback date.

    View the Letter.
  • Financial Stability Board Consults on Reporting on the Use of Compensation Tools to Address Misconduct Risk
    05/07/2018

    The Financial Stability Board has published proposed Recommendations for consistent national reporting of data concerning the use of compensation tools to address misconduct risk in significant financial institutions. The FSB is proposing a supervisory framework for the collection and reporting of data, which can be used by supervisors for monitoring and analyzing the effectiveness of compensation frameworks in addressing misconduct risk. The information so collected is intended to assist supervisors to understand and review: (i) the importance of individual conduct within the firm's incentive compensation framework and the role of compensation policy in establishing a sound risk and conduct culture; and (ii) the use of compensation tools in practice and their role in ensuring accountability when misconduct occurs.

    Read more.
  • European Banking Authority Reports on Compensation Trends in EU Credit Institutions and Investment Firms
    04/10/2018

    The European Banking Authority has published a report entitled "Benchmarking of remuneration practices at the European Union level and data on high earners." The report sets out the EBA's analysis of the compensation data provided to it by national regulators for 2016, which the EBA has compared with data from 2015 and 2014. The Capital Requirements Directive requires the EBA to benchmark remuneration trends in credit institutions and investment firms at EU level and to publish aggregated data on high earners earning EUR 1 million or more per financial year. National regulators are required to collect the relevant information from credit institutions and investment firms and to submit it to the EBA.

    The analysis shows a slight decrease in 2016 in the number of high earners paid EUR 1 million or more. There was also a significant decrease in the number of identified staff subject to a cap on the ratio of fixed to variable compensation, although the EBA notes that this was due to a significant reduction by two banks of their numbers of identified staff. The EBA also notes that the supervisory framework for compensation practices is still not sufficiently harmonized, with significant differences among Member States and among institutions in the application of deferral and payout in instruments.

    Read more.
  • Financial Stability Board Issues Supplementary Guidance to its Principles and Standards on Sound Compensation Practices
    03/09/2018


    The Financial Stability Board has published the finalized version of its Supplementary Guidance on its Principles and Standards on Sound Compensation Practices, following feedback to a consultation it launched in June 2017. The Supplementary Guidance relates to the use of compensation tools to address misconduct risk. Misconduct, for the purposes of the Supplementary Guidance, should generally be understood as conduct that falls short of expected standards, including legal, professional, internal conduct and ethical standards.

    The Supplementary Guidance is consistent with the FSB’s existing Principles and Standards on Sound Compensation Practices and provides guidance on better practice for addressing misconduct risk without adding any new or additional principles or standards. It is broken down into sections covering: (i) governance of compensation and misconduct risk; (ii) effective alignment of compensation with misconduct risk; and (iii) supervision of compensation and misconduct risk. FSB members are asked to apply the Supplementary Guidance to significant institutions and in a way consistent with the law and regulation of their jurisdictions.

    View the Supplementary Guidance.

  • US Department of Labor Extends Transition Period for Fiduciary Rule Exemption
    11/29/2017

    The US Department of Labor issued a notice extending the transition period for the Best Interest Contract exemption, and other exemptions, from the prohibited transaction provisions of the Fiduciary Rule for an additional 18 months, from January 1, 2018 to July 1, 2019, in order to give the Department additional time to review the public comments received on the exemptions and to consider the impact of the exemptions on the market. In the interim, financial institutions and advisers subject to the Fiduciary Rule must continue to follow the Impartial Conduct Standards set forth in the BIC to the extent they receive forms of compensation that are otherwise prohibited by ERISA and the Code.

    View
    text of the notice.
    TOPIC: Compensation
  • Financial Conduct Authority Publishes Policy Statement on Remuneration in Capital Requirements Directive IV Firms
    05/03/2017

    The Financial Conduct Authority has published a Policy Statement containing final Handbook text and guidance on the requirements for remuneration policies that apply to firms subject to the Capital Requirements Directive IV. Such firms are required to comply with the FCA's Remuneration Code. The FCA consulted on these from September to November 2016. The final rules are broadly as consulted upon, with minor changes to clarify the status of "retention awards" as being different from "guaranteed variable remuneration".

    The FCA has aligned its Handbook provisions to comply with the European Banking Authority Guidelines on Sound Remuneration Policies, which came into force on January 1, 2017. The FCA has also published new non-Handbook guidance to address frequently asked questions on remuneration. The Prudential Regulation Authority further published a Policy Statement and final consolidated Supervisory Statement on its expectations on remuneration on April 12, 2017, which aims to bring its approach in line with the EBA Guidelines.

    View the Policy Statement.

    View the FCA Guidance.

    View the EBA Guidance.
  • UK Prudential Regulation Authority Publishes Final Consolidated Guidance on Remuneration
    04/12/2017

    The Prudential Regulation Authority has published a Policy Statement and final consolidated Supervisory Statement on its expectations on remuneration. In the latter part of 2016, the PRA consulted on its proposed changes to its guidance to bring this into line with the European Banking Authority's Guidelines on Sound Remuneration Policies which applied from January 1, 2017. The remuneration rules and guidance apply to banks, building societies and investment firms, including UK branches of non-EEA headquartered firms. The PRA has introduced a consolidated Supervisory Statement on remuneration by amalgamating the existing statements on proportionality, the application of malus to variable remuneration and other existing measures. The new Supervisory Statement covers the PRA's expectations on proportionality, material risk takers, the application of malus and clawback to variable remuneration, governing body/remuneration committees, risk management and control functions, remuneration and capital, risk adjustment (including long-term incentive plans), personal investment strategies, remuneration structures (including guaranteed variable remuneration, buy-outs and retention awards), deferral and breaches of the remuneration rules.

    View the PRA's Policy Statement.

    View the consolidated Supervisory Statement.

    View the PRA's original consultation paper.
    TOPIC: Compensation
  • Latest EU Report on High Earners Published
    02/01/2017

    The European Banking Authority published a Report on high earners using data accumulated as at the end of 2015. The Capital Requirements Directive, as amended, imposes compensation requirements on banks for staff who are considered to have a material impact on the bank's risk profile, and there is a cap on the ratio of fixed to variable compensation for identified staff – known as the bonus cap. The EBA is required to publish aggregated data on high earners who earn EUR1 million or more per financial year. The EBA's report analyzes information for the year 2015 and compares it to 2014 data. The analysis shows, amongst other things, that the number of high earners awarded EUR 1 million or more in annual remuneration has increased by 33%, largely as a result of changes in the exchange rate between the euro and pound sterling.  The number of identified staff was largely unchanged between 2014 and 2015.

    In previous years the EBA has published this data at the same time as the benchmarking of remuneration trends. Going forward, the benchmarking information will be published only biannually. The data on high earners will continue to be published annually.
     
    View the Report.
    TOPIC: Compensation
  • European Central Bank Publishes Outcome of Supervisory Review and 2017 Recommendations on Dividends and Variable Remuneration
    12/15/2016

    The European Central Bank published the outcome of its second Supervisory Review and Evaluation Process in 2016 and updated Recommendations on dividend distribution and remuneration policies for 2017. The ECB comments that SREP outcomes reveal a broadly stable capital demand for 2017 and that any changes in individual bank levels reflect changes in individual bank risk profiles. The aggregate capital demand by directly supervised banks for 2017 is comparable to that of 2016, with an average of around 10% Common Equity Tier 1. The ECB also imposed liquidity measures that require banks to have higher liquidity coverage ratios than the regulatory minimum. 

    The updated ECB Recommendations on dividend distribution and remuneration policies are to be adopted in 2017, for the financial year 2016. The ECB has maintained its general stance on both topics whilst accounting for regulatory change on the obligation of the supervisor to differentiate between the types of Pillar 2 capital that a bank is required to hold. 

    View the press release

    View the recommendations.
  • Final Report on Investment and Corporate Banking Market Study Published by UK Regulator 
    10/18/2016

    The Financial Conduct Authority published its final report on the investment and corporate banking market study. The focus of the study was on primary market activities in the UK, including equity capital markets, debt capital markets and merger and acquisition services. The FCA published its interim report in April 2016, consulting on its proposed remedies to the deficiencies identified. The FCA does not consider the feedback received an indication that there is any reason to change its interim findings. The FCA concludes that whilst there are a wide range of banks and advisers active in the provision of primary markets services and despite finding that a number of clients, in particular corporate clients, believe that they are well served by such providers, there are some practices undertaken by certain providers that could have a negative impact on competition, particularly for smaller clients. 

    The FCA is proposing a ban on restrictive contractual clauses in investment and corporate banking engagement letters and contracts where the clause covers future corporate finance services carried out from a UK establishment. Some banks use clauses in agreements that oblige clients to award or offer future services to that same bank. The FCA considers the most restrictive of these the “right of first refusal” and “right to act” clauses - which the regulator proposes to prohibit. The FCA is proposing to exclude engagement letters relating to bridging loans from the prohibition; because the nature of this type of loan means that banks are unlikely to offer such a loan if it cannot confirm whether it would be instructed to provide the longer term financing. Responses to the consultation are due by December 16, 2017. The FCA aims to publish a policy statement early in 2017 and is proposing that the rules would also apply from early in 2017. 

    Read more.
  • European Securities and Markets Authority Publishes Final Guidelines on Remuneration Practices 
    10/14/2016

    The European Securities and Markets Authority published two sets of final Guidelines on Sound Remuneration Policies under the Undertakings for Collective Investments in Transferable Securities Directive and the Alternative Investment Funds Management Directive. The Guidelines follow ESMA’s final report that was published in March of this year.

    The UCITS Sound Remuneration Guidelines will apply to management companies, including those that are subsidiaries of credit institutions subject to sector-specific remuneration principles, and investment companies that have not designated a management company authorized under the UCITS Directive. The Guidelines set out the obligations of the management company to manage its financial situation and the governance of remuneration (which includes issues such as the design, approval and oversight of the remuneration policy) and outline the requirements for establishing and applying remuneration policies and practices for management companies and their identified staff, specifying the categories of identified staff. 

    Read more.
  • European Banking Authority Publishes Final Guidelines on Remuneration Policies for Retail Banking Sales Staff
    09/28/2016

    The European Banking Authority published final Guidelines on compensation policies and practices related to the sale and provision of retail banking products and services. The purpose of the Guidelines is to protect consumers from risks associated with poor compensation policies and practices that promote the mis-selling of financial products. The Guidelines apply to compensation paid to staff employed by credit institutions, credit intermediaries, payment institutions and electronic money institutions when selling deposits, payment accounts, payment services, electronic money, residential mortgages and other forms of credit to consumers. The Guidelines contain a framework for such firms to implement compensation policies and practices to improve the correlation between compensation of sales staff and the fair treatment of consumers, with the overall objective of reducing the risk of mis-selling whilst also minimizing conduct costs for firms. The final Guidelines have been amended following feedback received during consultation. Amendments include separate requirements for approval and monitoring of compensation policies and practices, clarification of the type of information to be recorded by firms to achieve compliance, limiting delegation of design and monitoring of compensation policies to ensure that the management body retains ultimate responsibility and clarification that the need to obtain advice on the compensation policies and practices is limited to firms that have established a compensation committee. The implementation date of Guidelines has been postponed from January 3, 2017 to January 13, 2018. The extension is to provide market participants with enough time to implement the Guidelines given the revised application date of MiFID II of January 3, 2018 and align with the application date of the Payment Services Directive II, January 17, 2018.

    View the Guidelines.
    TOPIC: Compensation
  • UK Regulators Consult on Compensation Guidance
    09/28/2016

    The Prudential Regulation Authority and the Financial Conduct Authority published proposed revised guidance on remuneration, principally to bring their guidance into line with the European Banking Authority's Guidelines on Sound Remuneration Policies which apply from January 1, 2017. The remuneration rules and guidance will apply to banks, building societies and investment firms, including UK branches of non-EEA headquartered firms.

    Read more
    TOPIC: Compensation
  • UK Prudential Regulation Authority Publishes Final Rules for Buy-Outs of Variable Remuneration
    09/28/2016

    The Prudential Regulation Authority published a Policy Statement and final rules on buy-outs of deferred variable remuneration, i.e., where a firm compensates a new employee for deferred variable remuneration not received from a previous employer due to the employee having left the former firm. Current compensation rules, which seek to encourage greater alignment between risk and reward, as well as more effective risk management, allow employers to withhold or reduce unpaid or unvested awards (i.e., the "malus" rules) or recoup paid or vested awards (i.e., the "clawback" rules). The PRA is concerned that the practice of buy-outs could undermine these rules as employees could evade accountability for their actions during a previous employment by moving to a new employer who buys out their cancelled deferred remuneration.

    Read more.
    TOPIC: Compensation
  • European Banking Authority Launches Data Collection Exercise to Assist with Review of the Prudential Framework for Investment Firms
    07/15/2016

    The European Banking Authority launched a data collection exercise to support its response to the European Commission’s Call for Advice on a new prudential framework for investment firms subject to the Markets in Financial Instruments Directive. In December 2014, the Commission sought technical advice from the EBA and the European Securities and Markets Authority on whether the current prudential framework applicable to MiFID investment firms under the Capital Requirements Directive and Capital Requirements Regulation was appropriate in terms of risk sensitivity, proportionality and complexity. In response, the EBA concluded that the regime was not appropriate for the risks that MiFID investment firms are exposed to and made recommendations. 

    Read more.
  • European Banking Authority Publishes Translations of the Final Guidelines on Sound Remuneration Policies
    06/28/2016

    The European Banking Authority published translations of its final Guidelines on sound remuneration policies. The final Guidelines are applicable to banks and investment firms and cover all staff with particular aspects focusing on staff whose professional activities have a material impact on a firm's risk profile. The Guidelines will apply from January 1, 2017 and will repeal the existing guidelines produced by the Committee of European Banking Supervisors in December 2010. The Guidelines set out detailed requirements for remuneration policies, the related governance arrangements and processes for implementing remuneration policies. 

    View the Final Guidelines.
    TOPIC: Compensation
  • US Federal Agencies Issue Proposed Rule to Implement Incentive-Based Compensation Restrictions
    04/21/2016

    The National Credit Union Administration re-proposed a rule that would establish incentive-based compensation restrictions on certain financial institutions. The OCC, the FDIC and the Federal Housing Finance Agency followed with their own versions of the proposed rule on April 26, 2016, and the Federal Reserve Board approved its version of the rule on May 2, 2016. The OCC, FDIC, FHFA and Federal Reserve Board proposed rules are substantially similar to the NCUA proposal. The proposed rule, issued pursuant to Section 956 of the Dodd-Frank Act, will ultimately take the form of a joint rulemaking among these agencies and the Securities and Exchange Commission, and replaces an earlier proposal issued in 2011. 
    TOPIC: Compensation
  • European Securities and Markets Authority Joins European Banking Authority in Call for Legislative Changes on Application of Remuneration Requirements
    03/31/2016

    The European Securities and Markets Authority published its final report on Guidelines on the sound remuneration policies under the Units in Collective Undertakings Directive and the Alternative Investment Fund Managers Directive, including the final Remuneration Guidelines under UCITS V and revised Remuneration Guidelines under the AIFMD. ESMA also published a letter addressed to the European Commission, the European Parliament and the Council of the European Union in which ESMA recommends that legislation is required to provide clarity on the application of the proportionality principle to the remuneration requirements under EU laws.  
     
  • European Banking Authority Reports on Implications of the EU Compensation Requirements and Bonus Cap
    03/30/2016

    The European Banking Authority published its Benchmarking of Remuneration and High-Earners 2014 report. Under the Capital Requirements Directive, as amended, banks are subject to compensation requirements for staff who have a material impact on the bank's risk profile, and there is a cap on the ratio of variable to fixed compensation for identified staff – known as the bonus cap. The EBA is required to benchmark EU compensation trends and to publish aggregated data on high earners who earn EUR1 million or more per financial year. The EBA's report analyzes information for the year 2014 and compares it to 2013 data. The analysis shows, amongst other things, that: (i) the number of high earners has increased by 21.6%, mostly due to changes in the exchange rate between the euro and pound sterling; (ii) differences in national implementation remain, in particular the application of deferral and pay-out in instruments; (iii) the number of identified staff has increased by 84.34% following the application of the technical standards on criteria to identify staff who have a material impact on a firm's risk profile (introduced in June 2014); and (iv) the ratio between variable and fixed remuneration for identified staff dropped to 65.48% from 104.27% in 2013. The European Commission will take the report into account in its review of the compensation provisions under the CRR. 

    View the EBA's report.
    TOPIC: Compensation
  • UK Competition and Markets Authority Proposes Further Remedies in Retail Banking Market Investigation
    03/05/2016

    The Competition and Markets Authority has extended the timetable for its investigation into the retail banking market to August 12, 2016 and published for consultation revised proposals to remedy the adverse effects on competition identified in its provisional report. The CMA's report was originally scheduled for publication in February 2016. The provisional report, published in October 2015, identified several competition issues in the Personal Current Accounts and Small and Medium-sized Enterprises banking market, including: (i) a lack of transparency making comparison of different providers difficult; (ii) due to (i) and the perception that it is burdensome / the lack of confidence in switching services, small numbers of customers switching to different bank accounts; (iii) new banks and new products not attracting new customers, leading to the established banks having incumbency advantages; and (iv) high numbers of SMEs holding their business accounts in the same banks as their PCAs, with low levels of switching. The CMA also noted the general disadvantage faced by SMEs in terms of limited choice compared to larger customers. Following that report, the CMA proposed certain remedies, including (i) requiring banks to prompt customers to review the service they receive by receiving individual messages at certain "trigger points"; (ii) encouraging consumers and businesses to compare bank products by using Midata, an industry online tool, that allows consumers to easily access their banking data and compare it with other services; and (iii) creating a price comparison service for SMEs. Feedback to the initial consultation on the proposed remedies was that they would not sufficiently redress the adverse effects on competition. The revised remedy proposals seek to address those weaknesses. Feedback on the revised proposals are due by March 21, 2016.
     
    View the revised remedy proposals.
     
    View the revised timetable.
    TOPIC: Compensation
  • UK Regulator Consults on New Rules for Buy-Outs of Variable Remuneration 
    01/13/2016

    The Prudential Regulation Authority published a consultation paper on proposals to introduce new rules on buy-outs of deferred variable remuneration, i.e. where a firm compensates a new employee for deferred variable remuneration not received from a previous employer due to the employee having left the former firm. The new rules would apply to PRA-regulated banks, building societies and designated investment firms and would amend the existing Remuneration Part of the PRA Rulebook (known as the PRA Remuneration Code until the PRA and Financial Conduct Authority Remuneration Codes were split). Current remuneration rules, which seek to encourage greater alignment between risk and reward as well as more effective risk management,  allow employers to withhold or reduce unpaid or unvested awards (i.e. the rules of malus) or recoup paid or vested awards (i.e. the rules of clawback). The practice of buy-outs could undermine these rules as employees could potentially evade being accountable for actions they carried out in their previous employment by moving to a new employer who buys-out their cancelled deferred remuneration. The PRA proposes that buy-out terms in contracts between new employers and employees should allow for malus or clawback to be applied following a notification by the old employer if an employee is found guilty of misconduct or risk management failings in his previous employment. The PRA is proposing to allow new employers to apply for a waiver for each employee if they believe the old employer's decision to apply malus or clawback was unfair or unreasonable. Responses to the consultation are due by April 13, 2016.
     
    View the consultation paper.
    TOPIC: Compensation
  • European Banking Authority Consults on Guidelines for Compensation for Sales Staff of Retail Banking Services and Products
    12/22/2015

    The European Banking Authority published proposed Guidelines on compensation policies and procedures related to the sale and provision of retail banking products and services. The EBA is seeking to address the issues arising out of the recent cases on misconduct and mis-selling by staff in financial institutions where poor remuneration policies and practices have been identified as a root cause. The proposed Guidelines apply to the remuneration paid to staff employed by banks, credit intermediaries, payment institutions and electronic money institutions when selling mortgages, personal loans, deposits, payment accounts, payment services and/or electronic money. The proposed Guidelines set out the design of remuneration policies and practices, including prevention of conflicts of interest, using quantitative and qualitative criteria for determining variable remuneration and how the rights and interests of consumers should be taken into account. The EBA also proposes that remuneration policies and practices should be documented, and that such documentation should be retained for five years, be accessible to staff and made available to national regulators on request. Responsibility for complying with the Guidelines would rest with the management body of a firm. The consultation closes on March 22, 2016.
     
    View the consultation paper.
  • European Banking Authority Publishes Final Guidelines on Sound Remuneration and Recommends Legislative Changes
    12/21/2015

    The European Banking Authority published final Guidelines on sound remuneration policies and an Opinion on the application of proportionality to the remuneration provisions in the Capital Requirements Directive. The final Guidelines are applicable to banks and investment firms and cover all staff with particular aspects focusing on staff whose professional activities have a material impact on a firm's risk profile. The Guidelines will apply from January 1, 2017, a year later than originally intended. Therefore, firms do not need to amend their existing compensation practices for the 2016 performance year.  The Guidelines set out detailed requirements for remuneration policies, the related governance arrangements and processes for implementing remuneration policies, updating the guidelines on remuneration policies published by the Committee of European Banking Supervisors to take into account changes introduced by the revised CRD IV, technical standards on the identification of staff and on the instruments which can be used for variable remuneration, the EBA's opinion on the use of allowances and industry developments.

    Read more.
    TOPIC: Compensation
  • European Central Bank Decision on Exclusion of Staff Members from Presumption of Having a Material Impact on Risk Profile of a Supervised Bank Published in Official Journal of the European Union
    12/01/2015

    The Decision of the European Central Bank on the procedure to exclude staff members from the presumption of having a material impact on a supervised credit institution's risk profile was published in the Official Journal of the European Union. The Decision relates to the remuneration requirements specified in the Capital Requirements Directive IV. The Decision sets out the procedure that supervised credit institutions should follow for the notification and application to the ECB to exclude members of staff or categories of staff from the presumption of having a material impact on their risk profile. The Decision sets out: (i) the general information required and to be provided to the ECB; (ii) the documentation required to show that a business unit is not material; (iii) the documentation required to show that a staff member's professional activities have no material impact on the risk profile of a material business unit; (iv) the additional documentation required to substantiate applications for staff members awarded a total remuneration of €1,000,000 or more; (v) the period for filing notifications; and (vi) details related to the assessment process of the ECB. The decision entered into force on December 2, 2015.
     
    View the Decision.
    TOPIC: Compensation
  • European Banking Authority Reports on Approved Higher Ratios for Compensation
    11/12/2015

    The European Banking Authority published a report on the use by banks of the possibility to increase the maximum ratio between variable and fixed remuneration up to 200% with shareholder approval. Under the Capital Requirements Directive, the ratio is limited to 100% unless a Member State allows firms to increase the ratio provided certain criteria are met. All Member States, except for Belgium, Romania, Slovenia and Sweden, have allowed firms the ability to increase the ratio. Only firms in 15 Member States have used that ability. The report also notes that firms have made use of the increase in Member States where remuneration levels are higher.
     
    View the report.
    TOPIC: Compensation
  • European Banking Authority Reports on Measures Taken on Role-Based Allowances 
    11/12/2015

    The European Banking Authority published a report on the steps taken by national authorities to ensure that firms that had introduced role-based allowances as fixed remuneration had taken or were taking steps to revise their remuneration policies. Role-based allowances were introduced by some firms following the introduction of the EU bonus cap, a limit of the ratio between the variable and fixed parts of remuneration of 100%. The EBA published an Opinion in October 2014 in which it stated that role-based allowances that are not predetermined, transparent to staff, permanent and that provide incentives to take risks are not compliant with the requirements under the Capital Requirements Directive. The EBA had asked national regulators to ensure that remuneration policies complied with its Opinion by December 31, 2014. The EBA's report confirms that national regulators have taken such measures although some of those will only be effective for remuneration awarded for the performance year 2015. The EBA intends to include criteria on classifying remuneration as either fixed or variable in its guidelines on sound remuneration policies. It is also working with the European Commission to review whether the CRD requires further reinforcement in this area.
     
    View the report.
    TOPIC: Compensation
  • Financial Stability Board Publishes Progress Report on Compensation Practices
    11/10/2015

    The Financial Stability Board published its fourth progress report on implementing the FSB's principles for sound compensation practices and their implementation standards. The progress report states that almost all FSB jurisdictions have fully implemented the principles and standards for banks which were issued in 2009. The FSB report also states that: (i) the oversight of compensation practices has been embedded in bank supervisory frameworks in most jurisdictions; (ii) several jurisdictions have shown an increase in the fixed portion of remuneration in 2014 compared to 2011; and (iii) compensation and risk governance frameworks are increasingly linked.
     
    View the report
    TOPIC: Compensation
  • US Securities and Exchange Commission Adopts Rule for Pay Ratio Disclosure under Dodd-Frank
    08/05/2015
    TOPIC: Compensation
  • US Securities and Exchange Commission Adopts Rule for Pay Ratio Disclosure Under Dodd-Frank
    08/05/2015
    TOPIC: Compensation
  • UK Regulators Publish Further New Rules on Remuneration
    06/23/2015

    The Prudential Regulation Authority and Financial Conduct Authority issued a joint Policy Statement on new remuneration rules to strengthen the alignment of risk and reward,. The changes to the PRA Rulebook and FCA Handbook will apply to banks, building societies, PRA designated investment firms as well as UK branches of non-EEA headquartered firms. The new rules apply to all Material Risk Takers and Senior Managers covered by the incoming Senior Managers Regime which takes effect next year. The changes include: (i) extending deferral periods for Senior Managers to no less than seven years, with no vesting period prior to the third anniversary of the award and vesting no faster than on a pro-rata basis; (ii) extending deferral periods for all other MRTs to no less than five years, with vesting no faster than pro-rata from one year (PRA only requirement); (iii) clarifying that the rule that no variable remuneration should be paid to the management body of a firm which receives exceptional government support unless justified applies to all discretionary payments but would not apply to firms receiving emergency liquidity assistance; (iv) a new FCA rule requiring firms to apply clawback where there is misconduct or risk management failures up to seven years from the date of a variable remuneration award (the PRA implemented the same rule from January 1, 2015); and (v) extending the clawback period by up to three years, in addition to the seven years for PRA-designated Senior Managers where there are outstanding internal or regulatory investigations at the end of the normal seven-year clawback period. The final rules on clawback and deferrals will apply to variable remuneration awarded for performance periods beginning on or after January 1, 2016. The remainder of the new rules will apply from July 1, 2015.

    View the Policy Statement.
    TOPIC: Compensation
  • US Securities and Exchange Commission Provides Additional Analysis Related to Proposed Pay Ratio Disclosure Rules
    06/04/2015

    The US Securities and Exchange Commission’s Division of Economic and Risk Analysis published additional analysis related to its proposed rules for pay ratio disclosure. Among other things, the analysis considers the potential effects of excluding different percentages of employees from the pay ratio calculation. In September 2013, the SEC proposed rules that would require the disclosure of the median of the annual total compensation of all employees of the issuer, the annual total compensation of the chief executive officer of the issuer and the ration of the median of the annual total compensation of all employees of the issuer to the annual total compensation of the chief executive officer of the issuer. The analysis and proposed rules are available for public comment until July 6, 2015.

    View the SEC analysis.

    View the proposed SEC rules for pay ratio disclosure.
    TOPIC: Compensation
  • UK Financial Conduct Authority Publishes Letter to Certain Firms on the Application of Malus
    05/21/2015

    The Financial Conduct Authority published a letter from its Director of Supervision, Clive Adamson, to the Remuneration Committee Chair of banks, building societies and investment firms with total assets exceeding £50 billion. The letter highlights the FCA’s expectations on the application of malus (bonus clawback) ahead of the annual review of remuneration policies and practices by the FCA and the Prudential Regulation Authority. Following the first annual review, the FCA published guidance to share best practices on the application of malus to variable remuneration and ex-ante risk adjustments.

    View the letter.
    TOPIC: Compensation
  • Application of EU Requirements for Remuneration Policies for Small and Non-Complex Firms Confirmed
    05/14/2015

    The European Banking Authority published letters between itself and the European Commission on the application of the proportionality principle to the remuneration requirements under the EU Capital Requirements Directive and Capital Requirements Regulation. The proportionality principle states that firms should implement the remuneration provisions in a manner and to the extent that is appropriate to the firm’s size, internal organization and the nature, scope and complexity of its activities. The EBA requested the Commission's views on the approach that the EBA should adopt to interpreting the proportionality principle in its guidelines on sound remuneration policies. The EBA noted that on a legal interpretation of CRD IV the remuneration principles must be applied proportionately, but that there could be no waiver for small or non-complex firms. However, a waiver might be justified on policy grounds for small and non-complex firms because variable remuneration paid is low and the incentives for employees to take risks is low but implementing costs would be significant. The European Commission confirmed that the EBA should follow its legal interpretation as to do otherwise would be to take a policy decision, which is outside of its powers. The EBA is consulting on draft guidelines on sound remuneration policies, adopting the Commission's approach.

    View the EBA letter.

    View the Commission’s response.
     
    TOPIC: Compensation
  • US Securities and Exchange Commission Proposes Executive Compensation Disclosure Rules
    04/29/2015


    The US Securities and Exchange Commission proposed rules that would require companies to disclose to shareholders the relationship between executive compensation and the financial performance of a company. The proposal, which is designed to enhance company transparency and to allow shareholders to be better informed when making voting decisions to elect directors, would require a company to disclose for itself as well as for other companies in its peer group certain information, including but not limited to information regarding executive pay and performance as well as total shareholder return. Under the rule, companies would be required to disclose the relevant information for the last five fiscal years. Smaller reporting companies, as defined in the proposed rule, would only be required to provide disclosure for the last three fiscal years. The proposed rule provides for a phased-in compliance period for these requirements. The comment period for the SEC proposal is 60 days after publication in the Federal Register which occurred on April 29, 2015. 

    View our client note on this development.

    View the SEC press release.

    TOPIC: Compensation
  • Financial Conduct Authority Consults on Guidance on the Application of Performance Adjustment
    03/26/2015

    The Financial Conduct Authority published proposed guidance on the application of ex-post risk adjustment to variable compensation (also known as performance adjustment). Ex-post risk adjustment is the adjustment of variable compensation to take into account a specific crystalized risk or adverse performance outcome and includes measures such as reducing current year awards, the application of malus and clawback. The proposed guidance is intended to amend and replace the guidance consulted on by the FCA in its joint consultation paper with the Prudential Regulation Authority on strengthening the alignment of risk and reward at the end of 2014. The revised proposed guidance will only apply to dual-regulated firms — banks, building societies and PRA-designated investments firms — and not to firms that are only regulated by the FCA, as was proposed in the 2014 consultation. The FCA notes that the revised proposed guidance may need to be amended depending on the outcome of the European Banking Authority's consultation on guidelines on sound compensation policies under the EU Capital Requirements Directive and Capital Requirements Regulation, known as CRD IV. Responses to the FCA's consultation are due by May 7, 2015. The FCA expects that the final revised proposed guidance will come into effect in summer 2015.
     

    View the consultation paper.

    TOPIC: Compensation