European Banking Authority Guidance on Financial Services Bonus Cap

by Morgan Lewis
Contact

Affected financial institutions and investment firms will need to overhaul the way they remunerate many of their highest-paid staff.

On 21 May, the European Banking Authority (EBA) published a consultation paper containing draft guidance on exactly who will be affected by the European Commission's proposed cap on bonuses for the highest-paid individuals within European financial institutions and investment firms. The release of the guidance follows the European Parliament's recent approval of the Capital Requirements Directive IV (CRD IV), the legislative instrument that contains the new bonus cap rules. Affected entities should consider the significant impact of these rules now, in anticipation of implementation as early as 1 January 2014.

Who will be affected by the new bonus cap rules contained in CRD IV?

The new rules will apply to individuals who are "material risk takers" within all credit institutions and investment firms that are (1) based in the European Economic Area (EEA), (2) non-EEA-based subsidiaries of institutions and firms with headquarters in the EEA, or (3) EEA-based subsidiaries of institutions and firms with headquarters outside the EEA. The guidance contained in the EBA's consultation paper suggests that an individual will be a "material risk taker" for the purposes of CRD IV if

  1. the individual's total remuneration exceeds €500,000 per year;
  2. the individual is part of the 0.3% of staff with the highest remuneration in the institution or firm;
  3. the individual's remuneration bracket is equal to or greater than the lowest total remuneration of senior management and other risk takers; or
  4. the individual's bonus payments exceed €75,000 and 75% of the fixed component of remuneration.

What are the new bonus cap rules?

Once in force, CRD IV will apply to all bonus payments made to "material risk takers" other than payments due under existing contractual arrangements entered into before the draft CRD IV was first published on 27 June 2012. It introduces a maximum limit for bonus payments of 100% of an individual's basic salary. This cap can be raised to 200% of basic salary but only with shareholder approval, which it appears (although it is not entirely clear) will be required on an annual basis.

In addition, CRD IV specifies the following:

  • 25% of any bonus payment that exceeds 100% of an employee's basic salary will need to be deferred for a period of no less than five years. The specifics of the deferral mechanisms will be developed by the EBA by March 2014.
  • 100% of bonus payments will need to be capable of being clawed back in situations where an individual is culpable in future financial losses or where the individual's performance falls below the requisite standard.
  • Subject to the legal structure of the organisation, at least 50% of the bonus payment will need to be in shares or an equivalent financial instrument.
  • Early termination payments must be performance specific (the idea being that exiting employees will no longer be rewarded for misconduct and failures).
  • Remuneration committees will have to take into account "public interest" when deciding the bonus, if any, that will be paid.
  • Remuneration polices will need to identify and make a distinction between criteria used to determine base salary and criteria used to determine bonus payments.

When will the rules come into force?

If CRD IV is approved by the European Council (as is expected) and published in the Official Journal of the European Union by 30 June 2013, the deadline for implementation in EEA member states will be 1 January 2014. Otherwise, the deadline will be pushed back to 1 July 2014.

What will the impact be?

The impact of these changes is expected to be considerable. Affected financial institutions and investment firms will need to radically overhaul the way they remunerate many of their highest-paid staff. Significant increases to base salary, the introduction of additional contractual allowances, and the increase of "fixed benefits" may all need to be considered. These rules may also deter some of the highest performers within non-EEA-headquartered organisations from moving to London or elsewhere within the EEA. Accordingly, there appears to be a real risk that, in seeking to constrain what it views as the excesses of the banking culture, the European Commission may damage the competiveness of the European Union's financial sector to the potential benefit of New York, Zurich, Hong Kong, and other major non-EEA financial centres around the world.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Nick Thomas
Matthew Howse
William Yonge

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis
Contact
more
less

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.