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CRD 3 and restrictions on remuneration in the financial services sector

18 January 2012 |

STOP PRESS

An amended version of CRD (the “Capital Requirements Directive”) 3 was published on 30 September 2010 by the Council of Europe.

On 10 December 2010 the Committee of European Banking Supervisors
(“CEBS”) published new guidelines on the Capital Requirements Directive
(“CRD 3”).  These new guidelines are covered separately in our “Breaking
News – New CEBS Guidelines Published on 10 December” article, click here.

Background

CRD 3 is to amend CRD in the following areas: remuneration policies;
trading book; re-securitisations; and, disclosure of securitisation
risks.

The CRD set out the requirements for credit institutions and
investment firms to comply with Basel II.  It was adopted in June 2006.

CRD 3 applies to directly to credit institutions, for example, banks
and building societies, and to investment firms within the scope of
MiFID.

The Commission believes that the remuneration arrangements in the
financial sector played a significant part in causing the credit
crunch.  It believes that those remuneration arrangements encouraged
excessive risk taking in order to realise short-term profits, at the
expense of the long-term health of the financial sector.

CRD 3 required the Committee of Banking Supervisors (“CEBS”) to
produce guidance on remuneration policies and practices.  In October
2010 CEBS published a consultation on the draft text of this guidance
known as CP42.  CP42 is expected to be finalised in December 2010 but
its guidelines are more readily understood than CRD 3 itself.

Proportionality

Firms must comply with CRD 3 “in a way and to the extent that is
appropriate to their size, internal organisation and the nature, the
scope and the complexity of their activities”.  This means that not all
firms have to apply the remuneration requirements in the same way and to
the same extent.

The factors that should be taken into account when assessing
proportionality include: size; internal organisation and nature scope
and complexity.

Which members of staff are caught by CRD 3?

CP42 states that the following staff members are caught: senior
management; risk takers; staff engaged in control functions and, any
employee whose total remuneration takes them into the same remuneration
bracket as senior management and risk takers.

CRD 3 requires firms to have a remuneration policy and CP42 sets out
some guidance on what should be taken into account when drafting the
remuneration policy.

It is expected that CRD 3 will be published in its final form in the
Official Journal by the end of 2010.  It is anticipated that its
provisions concerning remuneration will be in force from 1 January 2011.

On 4 November 2010 the FSA announced that they would undertake a
month long consultation on CRD 3.  The FSA now expects to publish its
policy statement containing its final remuneration code in December
2010.

CRD 3 Remuneration

CRD 3 splits remuneration into fixed remuneration and variable remuneration.

CP42 states that remuneration includes both monetary and non-monetary benefits.

A maximum ratio of variable to fixed remuneration for relevant staff.

What firms should consider when they pay variable remuneration.

When should be taken into account when determining performance related remuneration.

At least 50% of variable remuneration will not be in cash.  Instead
it will be comprised of an appropriate balance of shares or equivalent
ownership interests and tier 1 hybrid securities.

The ratio between fixed and variable remuneration.

Some financial services firms may have to pay bonuses partly by way
of convertible bonds.  These bonds would be convertible into equity if
either the firm’s performance or market conditions required the firm to
increase its regulatory capital.

At least 40% of variable remuneration (rising to 60% where the
variable remuneration is particularly high) will have to be deferred for
not less than 3 to 5 years.  This is to allow for post award adjustment
of variable remuneration.

Additional CRD 3 requirements

Additional requirements of CRD 3, as currently drafted, include the following:

The systems and controls that should be in place.

External disclosure of remuneration.

Commentary

It is likely that income tax and social security contributions and
CRD 3’s retention requirements will be an area of concern for some
employees.  This is due to the fact that there may be a requirement to
pay tax upfront on the shares or other instruments and this could exceed
the amount of upfront cash paid to the employees.

CP42 consultation document

For further information or to discuss the issues raised, please get in touch.

Disclaimer

Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.

Circular 230 disclosure

To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this article (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The author


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