The impact of regulation on remuneration in banks. An analysis of EU, UK and German law
©2017
Textbook
56 Pages
Summary
The excessive risk-taking at banks might account for the failure of financial undertakings, as well as to systemic problems in the European Union and around the world. The inappropriate design of remuneration systems in many financial institutions is reported to induce such risk-taking. The EU regulators have intervened through legislative measures which have been differently implemented in Member States. Such legislative measures face critics due to the restriction in banks’ freedom of business. However, this book will point out that regulations are necessary and can be justified in order to protect the common good of a sound functioning financial market. Nevertheless, the effectiveness of current legislative provisions is challenged. Therefore, this book will critically analyse the legislation of bankers’ remuneration, focussing on relevant EU, UK and German measures.
Excerpt
Table Of Contents
IV
NZG
Neue Zeitschrift für Gesellschaftsrecht*
para
paragraph
Plc
Public limited liability company
PRA
Prudential Regulation Authority
S
Seite (German for page)
S&P
Standard & Poor's
SYSC
Senior management arrangements, Systems and Controls
vol
volume
WiVerw
Wirtschaft und Verwaltung*
ZBB
Zeitschrift für Bankenrecht und Bankwirtschaft*
ZfU
Zeitschrift für Umweltpolitik & Umweltrecht*
ZHR
Zeitschrift für das gesamte Handels- und Wirtschaftsrecht*
ZIP
Zeitschrift für Wirtschaftsrecht*
ZRP
Zeitschrift für Rechtspolitik*
*German law journal
1
I. Introduction
`Excessive risk-taking (...) in banks (...) contributed to the failure of financial
undertakings and to systemic problems in the Member States and globally'.
1
Both
issues spread to other parts of the economy, causing tremendous costs for the
public. Inappropriately designed remuneration systems in financial institutions are
reported to induce such risk-taking.
2
The EU regulators intervened to control risks through legislative measures.
3
Those
measures have been differently implemented by Member States, making some
European markets more attractive for bankers than others. Furthermore, the EU
legislation is restricting banks' freedom of business, with possible negative effects of
competition among global financial markets. Even though this book will show both
supporting and objecting arguments towards bankers' remuneration, it will eventually
refute the thematic statement, and argue that the regulation of bankers' remuneration
is (mainly) necessary and justified to protect common goods of a sound functioning
financial market. Nevertheless, some legislative provisions' effectiveness will be
challenged.
This book will critically analyse the legislation of bankers' remuneration and detail
relevant differences. Firstly, after a brief summary of past developments, EU
legislative measures will be discussed. Then the part will be followed by an analysis
of implementation methods of these measures in the UK and Germany. Furthermore,
it is proved that the consequential negative impacts of such regulations are
outweighed by overall positive effects. Accordingly, future development in regulating
banker's remuneration is presented in short. Finally, an alternative regulatory
proposal with a different approach to the existing law is considered.
1
Commission Recommendation (2009/384/EC) of 30 April 2009 on remuneration policies in the
financial services sector [2009] L 120/22 preamble recital (1).
2
CRD IV preamble recital (62); Commission (n 1) recital (2).
3
Brad Rice and Lorraine Johnston, `Bankers' Bonuses Back in the Spotlight' [2014] 38 CSR 1, 1.
2
II. Legislative Background
1. Developments
The financial crisis, between 2007 and 2009,
4
occurred partly due to inappropriate
remuneration policies in banks.
5
Banks or credit institutions are financial
intermediaries in the payment system which collect money `(...) from the public and
(...) grant credits for their own account'.
6
The European Commission published
recommendations with regards to directors' remuneration,
7
addressing the issue of
inappropriately designed management remuneration,
8
`(...) since the potential for
abuse and conflicts of interests is essentially located there',
9
long before the crisis
had occurred. Only a minority of Member States had implemented at least half of the
recommendations.
10
Unregulated remunerations in the financial sector exposed
serious weaknesses, such as short-term thinking among bankers to raise own
compensation, without deliberating the corresponding risks.
11
To control such risks
and to prevent a future financial crisis, legislative measures regarding banker's
4
Larisa Dragomir, European Prudential Banking Regulation and Supervision: The legal dimension
(Routledge 2012) 41; Rosa M Lastra and Geoffrey Wood, `The Crisis of 2007-09: Nature, Causes
and Reactions' [2010] J Int Economic Law 13 (3), 531.
5
EBA, `EBA Report on the application of Directive 2013/36/EU (Capital Requirements Directive)
regarding the principles on remuneration policies of credit institutions and investment firms and
the use of allowances' [2014] EBA Report from 15 October 2014
<https://www.eba.europa.eu/documents/10180/534414/EBA+Report+on+the+principles+on+rem
uneration+policies+and+the+use+of+allowances.pdf> accessed 11 May 2016, ch I, para 3; CRD
IV preamble para (51); Norbert Röttgen and Hans-Georg Kluge, `Nachhaltigkeit bei
Vorstandsvergütungen' [2013] NJW 900; Dragomir (n 4) 19; Barbara Deilmann and Sabine Otte,
`Auswirkungen des VostAG auf die Struktur der Vorstandsvergütung' [2009] GWR 261.
6
Article 4 (1)(1) CRR; Article 3 (1)(1) CRD IV, Mathias Dewatripont and Jean Tirole, The
Prudential Regulation of Banks (The MIT Press 1994) 13.
7
Commission Recommendation (2004/913/EC) of 14 December 2004 fostering an appropriate
regime for the remuneration of directors of listed companies [2004] OJ L385/55 and Commission
Recommendation (2005/162/EC) of 15 February 2005 on the role of non-executive or supervisory
directors of listed companies and on the committee of the (supervisory) board [2005] OJ L52/51.
8
Preamble recital (1) Commission Recommendation (2004/913/EC) of 14 December 2004
fostering an appropriate regime for the remuneration of directors of listed companies [2004] OJ
L385/55.
9
Commission Recommendation of 30 April 2009 complementing Recommendations 2004/913/EC
and 2005/162/EC as regards the regime for the remuneration of directors of listed companies OJ
L 120/28 preamble recital (2); Preamble recital (13) Commission Recommendation
(2005/162/EC) of 15 February 2005 on the role of non-executive or supervisory directors of listed
companies and on the committee of the (supervisory) board [2005] OJ L52/51.
10
Commission Report (COM (2010) 285 final) of 2 Mai 2010 on the application by Member States
of the EU of the Commission 2009/385/EC Recommendation (2009 Recommendation of
directors' remuneration) complementing Recommendations 2004/913/EC and 2005/162/EC as
regards the regime for the remuneration of directors of listed companies 3.
11
CRD IV preamble recital (62); Lucian A Bebchuk and Jesse M Fried, `How to tie equity
compensation to long-term results' [2010] Journal of Applied Corporate Finance Vol 22 No 1, 99;
Lastra and Wood (n 4) 541.
3
remuneration have been introduced.
12
Following the Capital Requirements Directive
(CRD) III,
13
which first dealt with issues of pay, its successor the CRD IV
14
is
currently in effect, regulating managers' remuneration.
15
The following part will
explain relevant European provisions. The relevant UK and German rules will be
cited as well, to avoid repetition in succeeding chapters.
2. European Union Legislation
2.1 Capital Requirements Directive
The CRD IV aims to regulate remuneration policies and practices on a consistent
basis with an effective risk management.
16
Banks shall take `(...) into account
national criteria on wage setting (...) [and make] a clear distinction between'
17
fixed
remuneration, which is based on staffs expertise,
18
and `variable remuneration which
should reflect a sustainable and risk-adjusted performance (...)'.
19
A remuneration
policy is appropriate when it ensures the long-term sustainability of a company based
on pay for achievement.
20
12
CRD IV preamble recital (62); Avinash D Persaud, `A ticking time bomb: TLAC and other attempts
to privatise bank bail-outs' [2016] 3 JIBFL 160; Markus Weber, '§ 87' in Wolfgang Hölters (ed)
Aktiengesetz: AktG Kommentar (2
nd
ed, C H Beck Verlag 2014) § 87 para 30; Hans-Christoph
Ihrig and Carsten Schäfer, Rechte und Pflichten des Vorstands (Dr. Otto Schmidt Verlag 2014)
92; Rice and Johnston (n 2) 1; Bradley Rice, `Allowances: Fixed or Variable Pay?' [2014] 38 CSR
17, 136; Hans-Ulrich Wilsing and Carsten A Paul, `Reaktionen der Praxis auf das
Nachhaltigkeitsgebot des § 87 Abs. 1 Satz 2 AktG Eine erste Zwischenbilanz` [2010] GWR 363;
Commission Recommendation of 30 April 2009 complementing Recommendations 2004/913/EC
and 2005/162/EC as regards the regime for the remuneration of directors of listed companies OJ
L 120/28; Barbara Dauner-Lieb, `Die Verrechtlichung der Vorstandsvergütung durch das VostAG
als Herausforderung für den Aufsichtsrat Methodische Probleme im Umgang mit
Rechtsunsicherheit` [2009] Der Konzern 583, 586; Holger Fleischer, `Das Gesetz zur
Angemessenheit der Vorstandsvergütung (VostAG)` [2009] NZG 801, 802; Gregor Thüsing, `Das
Gesetz zur Angemessenheit der Vorstandsvergütung` [2009] AG 517, 520; The Guardian, `G20
leaders map out new economic order at Pittsburg summit' (The Guardian, 26 September 2009)
<www.theguardian.com/world/2009/sep/25/g20-summit-economy-bonuses-deficits> accessed 11
May 2016; Council of the European Union for Economic and Financial Affairs press release of the
2911
th
Council meeting on 2 December 2008, 2.
13
Directive 2010/76/EU of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as
regards capital requirements for the trading book and for re-securitisations, and the supervisory
review of remuneration policies OJ L329/3.
14
Directive 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the
prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC
and repealing Directives 2006/48/EC and 2006/49/EC OJ L176/338.
15
EBA (n 5) ch I, para 1.
16
CRD IV preamble recital (62); in Germany: para 4.2.3 second paragraph DCGK.
17
CRD IV Article 92 (2)(g).
18
CRD IV Article 92 (2)(g)(i); EBA (n 5) ch I, para 24 and 27.
19
CRD IV Article 92 (2)(g)(ii) and preamble recital (64); para 4.2.3 second paragraph DCGK.
20
Commission Report (n 10) 2; in the UK: SYSC 19D.3.8 R; in Germany: § 87 Abs 1 S 1 AktG; para
4.2.3 second paragraph DCGK.
4
2.1.1 Variable remuneration
The variable component of remuneration is linked to the employees and banks
performance,
21
and take `(...) financial and non-financial criteria into account',
22
for a
timeframe over several years.
23
Guaranteed variable remuneration is not permitted
under the principle of pay-for-performance,
24
and shall only be given in exceptional
circumstances, e.g. hiring new staff.
25
The total amount of fixed and variable remuneration payable to a banker shall be
appropriately balanced,
26
based on a ratio set by the bank.
27
However, that ratio
limits the variable component to 100 per cent of the fixed remuneration.
28
Member
States shall have the capability to set a lower maximum percentage,
29
but may also
allow shareholders of the bank to approve a variable remuneration between 100 and
200 per cent of the fixed remuneration.
30
Moreover, Member States may have the
power to set stricter requirements.
31
In the process of approving a higher ratio, the
bank shall provide a detailed recommendation to its shareholders,
32
who vote by a
majority of at least two-third, provided that 50 per cent of share-capital is present.
33
If
less capital is present an extraordinary resolution is required.
34
Employees, who are
directly concerned by the vote, shall have no voting rights if they hold shares in the
bank of their employment.
35
21
Commission (n 9) preamble recital (2)
22
CRD IV Article 94 (1)(a); Commission (n 9) preamble recital (6); in the UK SYSC 19D.3.39.
23
CRD IV Article 94 (1)(b); in the UK: SYSC 19D.3.8 R, 19D.3.30 G (1) and (2) and 19D.3.43 R; in
Germany: para 4.2.3 second paragraph DCGK; CRD IV Article 94 (1)(b) and preamble recital
(63); Commission (n 9) preamble recital (6); Commission Report (n 10) 3.
24
CRD IV Article 94 (1)(d), in the UK: SYSC 19D.3.44 R.
25
CRD IV Article 94 (1)(e).
26
CRD IV Article 94 (1)(f), in the UK: SYSC 19D.3.48 R (1).
27
CRD IV Article 94 (1)(g); para 4.2.3 second paragraph DCGK.
28
CRD IV Article 94 (1)(g)(i); Rice (n 12) 136; EBA (n 5) ch I, para 1; in the UK: SYSC 19D.1.3 R
(2) and 19D.3.48 R (3); in Germany § 25 a Abs 5 S 2 ff KWG.
29
CRD IV Article 94 (1)(g)(i).
30
CRD IV Article 94 (1)(g)(ii); Rice (n 12) 136; EBA (n 5) ch I, para 1 and 7; in the UK: SYSC
19D.1.3 R (2) and 19D.3.49 R (1) and (2); Commission (n 9) preamble recital (10).
31
CRD IV preamble recital (65).
32
CRD IV Article 94 (1)(g)(ii) second paragraph, first point, in the UK: SYSC 19D.3.50 R (2).
33
CRD IV Article 94 (1)(g)(ii) second paragraph, second point, in the UK: SYSC 19D.3.50 R (5) (a)
and (b).
34
CRD IV Article 94 (1)(g)(ii) second paragraph, second point, in the UK: SYSC 19D.3.50 R (5) (a)
and (b).
35
CRD IV Article 94 (1)(g)(ii) second paragraph, sixth point in the UK: SYSC 19D.3.50 R (4).
5
Member States may allow banks in their own national law to offer a discount rate of
up to maximal 25 per cent of the total variable remuneration if the latter is deferred
for at least five years.
36
The limitation of the total variable remuneration and the
involvement of shareholders shall ensure that there is no incentive for excessive risk-
taking and allow banks to design remuneration in accordance with its own needs,
37
but ensure that risks for the public are foreseeable and under control.
38
The variable remuneration shall be paid based on the employee's performance.
39
To
measure such performance future achievement and current risks as well as costs of
capital and the liquidity have to be taken into consideration.
40
The component of
variable remuneration shall be structured in a way that at least 50 per cent contain of
shares or share-linked instruments,
41
or additional "tier 1 or 2 capital"
42
instruments,
deferred for at least three to five years.
43
However, the variable remuneration,
including the deferred part, shall only be paid if the bank has a sustainable financial
situation and if the remuneration is justified based also on the bank's performance.
44
The variable remuneration is not justified if the employee's actions led to a serious
loss for the bank,
45
or it fails to comply with "standards of fitness and propriety".
46
In
those cases, the whole `(...) variable remuneration shall be subject to malus or
36
CRD IV Article 94 (1)(g)(iii) and recital (65); in the UK: ,SYSC 19D.3.52 R.
37
CRD IV Article 92 (2) and preamble recital (66); SYSC 19D.2.2 G (2); Commission (n 9) preamble
recital (3).
38
CRD IV preamble recital (65).
39
CRD IV Article 92 (2)(g)(ii) and Article 94 (1)(a) and (b); CRD IV preamble recital (63) and (64);
Commission Report (n 10) 3; Commission (n 9) preamble recital (6).
40
CRD IV Article 94 (1)(j) and (k); in the UK: SYSC 19D.3.23 R.
41
CRD IV Article 94 (1)(l)(i) and (2); , in the UK: SYSC 19D.3.56 R.
42
Tier 1 capital is the bank's core capital and Tier 2 capital is one part of supplementary capital
(shared with Tier 3), all used to determine whether or not a bank has "sufficient eligible capital",
taking into account the overall credit risk Frans De Weert, Bank and Insurance Capital
Management (John Wiley and Sons Ltd 2011) 55; Francesco Saita, Value at Risk and Bank
Capital Management: Risk Adjusted Performances, Capital Management and Capital Allocation
Decision Making (Academic Press 2010) 9-10 (with a good explanation what is included in
different capital types); Hennie van Greuning and Sonja Brajovic-Bratanovic, Analyzing Banking
Risk: A Framework for Assessing Corporate Governance and Risk Management (3
rd
edn, World
Bank Group Publications 2009) 157; D R Carmichael and others, Accountants' Handbook: 2
Volume Set/Special Industries and Special Topics (10
th
edn, John Wiley & Sons 2003) chapter
31, 12.
43
CRR Article 52 (1) and 63; CRD IV Article 94 (1)(l)(ii) and Article 94 (1)(m).
44
CRD IV Article 94 (1)(n); in the UK: SYSC 19D.3.27 R and 19D.3.61 R (1).
45
CRD IV Article 94 (1)(n) paragraph 3 (i), in the UK: SYSC 19D.3.29 R (1).
46
CRD IV Article 94 (1)(n) paragraph 3 (ii).
6
clawback arrangements'.
47
Bankers shall not circumvent the regulation for variable
remuneration by taking other measures to "undermine the risk alignment effects"
48
or
use vehicles that are not regulated in the CRD IV or CRR.
49
The CRD IV limits the
variable remuneration of staff with a considerable impact on the risk profile to make
financial institutions risk resistant.
50
The remuneration policy should, therefore, reflect
"sound and effective risk management",
51
taking into account the banks "long-term
interests".
52
2.1.2 Termination payments
Termination payments, also called "golden parachutes", should be only a safety net if
the contract of a director is canceled early, but not a reward for failure or
misconduct.
53
Therefore, termination payments shall have a cap on the amount of
two years' annual remuneration paid beforehand and should not be paid if a director
leaves because of insufficient performance or for his own account.
54
Precluded are
termination payments based on a change in the strategy of the company or in a
merger and/or takeover situation, which led to the cancellation of the directors'
contract.
55
47
CRD IV Article 94 (1)(n) paragraph 3, in the UK: SYSC 19D.3.29 R (2).
48
CRD IV Article 94 (1)(p); in the UK: SYSC 19D.3.32 R; in Germany para 4.3.2 DCGK; Standard
14 of FSB Principles for Sound Compensation Practices (Implementation Standards) of 23
September 2009 <http://www.fsb.org/wp-content/uploads/r_090925c.pdf?page_moved=1>
accessed 11 May 2016.
49
CRD IV Article 94 (1)(q); in the UK: SYSC 19D.3.34 R.
50
Rice (n 12) 136.
51
CRD IV Article 74 (1), 92 (2)(a) and 94 (1)(d); EBA (n 5) ch I, para 38 and 39; Rice (n 12) 136;
SYSC 19D.1.6 G (1), 19D.2.1 R and 19D3.7 R.
52
CRD IV Article 92 (2)(b); in the UK: SYSC 19D.3.8 R.
53
CRD IV Article 94 (1)(h); Commission (n 1) recital (16); Commission (n 9) preamble recital (7);
SYSC 19D.3.54 R.
54
para 4.2.3 fourth paragraph DCGK; Commission (n 9) preamble recital (7).
55
Commission (n 9) preamble recital (7).
7
2.1.3 Remuneration Committee
The bank shall set up a remuneration committee.
56
Members of the committee shall not
be influenced in their work by an inappropriate remuneration policy.
57
The committee
shall have a chair and members, who are all members of the management body
58
without executive functions,
59
and are independent as well as adequately trained, to
avoid insufficient incentives for risk in the bank's risk, capital or liquidity.
60
The
committee shall ensure that the `(...) long-term interests of shareholders, investors and
other stakeholders', as well as the public interest, are secured.
61
2.1.4 Supervision
Competent authorities must ensure that `(...) institutions at group, parent company and
subsidiary levels, including those established in offshore financial centers', comply with
the rules of CRD IV regarding remuneration practices,
62
in order to `(...) secure and
foster financial stability within the European Union'.
63
The evasion of the directives'
provisions shall be prevented. Therefore, "risk of excessive leverage"
64
must be
supervised. Information of bankers being remunerated EUR one million or more per
financial year
must be collected,
65
divided in business area and risk profile of the staff.
66
Adequate remuneration policies are crucial to set the right incentives for banks' risk
profile.
67
Information on natural person that are remunerated more than EUR one
56
CRD IV Article 92 (2)(f) and Article 95; in Germany: para 5.3.2 DCGK; Commission (n 9)
preamble recital (2); Commission Recommendation (2005/162/EC) of 15 February 2005 on the
role of non-executive or supervisory directors of listed companies and on the committee of the
(supervisory) board [2005] OJ L52/51, preamble recital (9).
57
CRD IV Article 92 (2)(e); in the UK: SYSC 19D.3.15 R (3)(a) and (b), SYSC 19D.3.9 R; in
Germany: para 4.3.3 and 5.4.1 DCGK; Commission (n 9) preamble recital (11).
58
Article 3 (1)(7) CRD IV; Article 4 (1)(9) CRR.
59
CRD IV Article 95 (2).
60
CRD IV Article 95 (1); in Germany: para 5.4.5 second paragraph DCGK; Röttgen and Kluge (n 5) 900.
61
CRD IV Article 95 (2); in Germany: para 5.5 DCGK.
62
CRD IV Article 92(1); CRD IV preamble recital (67); Commission (n 9), preamble recital (2).
63
CRD IV preamble recital (67); EBA (n 5) ch I, para 7.
64
CRD IV Article 87(1).
65
CRR Article 450 (1) (g), (h) and (i); CRD Article 75 (3); Regulation of 4 March 2014
supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard
to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to
identify categories of staff whose professional activities have a material impact on an institution's
risk profile [2014] OJ L 167/30, preamble recital (12); in Germany § 24 Abs 1a Nr 8 KWG.
66
CRD IV Article 75 (1) and (3).
67
EBA (n 5) ch I, para 3; Röttgen and Kluge (n 5) 900.
8
million per financial year shall be forwarded to EBA and published.
68
Member States
shall nominate a competent authority within their territory,
69
which has `(...) expertise,
resources, operational capacity, power and independence necessary to carry out the
functions relating to prudential supervision (...)'.
70
Competent authorities must ensure
that bankers with a high-risk hazard comply with the rules regarding remuneration, in
a manner which is not burdensome for the institution.
71
The management body in its
supervisory function shall adopt independent internal reviews at least annually.
72
Such external monitoring will be necessary as the management cannot always
control itself, due to conflicts of interests.
2.2 Capital Requirements Regulation
Banks shall under the Capital Requirements Regulation (CRR)
73
disclose information
regarding remuneration practices and policy for employees which have an important
impact on the banks' risk profile.
74
Transparency and disclosure are important to
ensure good remuneration practice.
75
Such information includes details about the
determination of remuneration,
76
performance criteria,
77
design of the remuneration
system and how it measures `(...) risk adjustment, deferral policy and vesting
criteria',
78
ratio between variable and fixed remuneration,
79
how the performance is
linked to share or other options,
80
and how the scheme for variable components of
remuneration is structured.
81
The number of individuals earning more than EUR one
million per financial year also has to be disclosed.
82
However, Member States or their
competent authorities can request information of the total remuneration for a member
68
CRD Article 73 (3).
69
CRD IV Article 4 (1).
70
CRD IV Article 4 (2).
71
CRD IV Article 92 (2); in the UK: SYSC 19D.3.4 R (1)(a).
72
CRD IV Article 92 (2)(c) and (d); in the UK: SYSC 19D.3.10 R.
73
Regulation (EU) No 575/2013 of 26 June 2013 on prudential requirements for credit institutions
and investment firms and amending Regulation (EU) No 648/2012 OJ L176/1.
74
CRR Article 450 (1) and CRR preamble (97).
75
CRR preamble recital (97); Commission Report (COM (2009) 114 final) of 3 March 2009
Communication for the spring European Council Driving European Recovery Volume 1, 4.
76
CRR Article 450 (1)(a).
77
CRR Article 450 (1)(b).
78
CRR Article 450 (1)(c).
79
CRD IV Article 94 (1)(g), CRR Article 450 (1)(d).
80
CRR Article 450 (1)(e).
81
CRR Article 450 (1)(f).
82
CRR Article 450 (1)(i).
9
of a bank's management.
83
If the bank is significant in size and complexity,
unspecified information about the total remuneration of the management body shall
be made public.
84
By disclosing such information to all relevant stakeholders, the
bank's risk associated with remuneration is ensured to be under control and
transparent to the market.
85
Disclosure furthermore enhances compliance with the
regulations of remuneration.
3. Legislation in the United Kingdom
In the United Kingdom, the FCA introduced the Remuneration Code ("the code"),
86
regulating 26 largest banks.
87
However, since its introduction, the code has been
reworked and widened in scope, based on further European legislation,
88
to become
applicable to a larger amount of firms.
89
The majority of rules from the code are equal
to those in the aforementioned EU legislation.
90
This and the following part will only
highlight features and differences
in the UK and German remuneration rules.
3.1 Limitation of remuneration
Bank employees in the areas of risk management and compliance must receive a
significantly lower variable than fixed remuneration component compared to
employees in other business areas.
91
This domestic UK principle may have emerged
from the general CRD IV provision to maintain an appropriate balance between
variable and fixed remuneration.
92
Good risk management means to compensate the
83
CRR Article 450 (1)(j); CRR preamble recital (97).
84
CRR Article 450 (2).
85
CRR preamble recital (97).
86
Senior management arrangements, Systems and Controls (SYSC) <https://www.the-
fca.org.uk/remuneration?field_fcasf_sector=unset&field_fcasf_page_category=141> accessed 11
May 2016.
87
Rice and Johnston (n 2) 1.
88
Regulation (EU) No 575/2013 of 26 June 2013 on prudential requirements for credit institutions
and investment firms and amending Regulation (EU) No 648/2012 OJ L176/1; Directive
2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers and amending Directives
2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 OJ L
174/1; Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business
of Insurances and Reinsurance (Solvency II) OJ L 335/1.
89
Rice and Johnston (n 2) 1.
90
Vide supra 4; SYSC 19D.1.6 G (2).
91
SYSC 19D.3.18 G (3).
92
See CRD IV Article 93 (f).
10
ability to maintain high profits while avoiding large losses.
93
Banks shall ensure to
attract and keep experienced employees appropriately trained to fulfil their tasks,
even though the variable remuneration of employees in compliance and risk
management must be significantly lower than the fixed component.
94
This is
controversial, as in risk management and compliance, senior highly skilled staff is
needed. Such staff may have a higher incentive to perform well through variable
remuneration. If risk management is measured by performing well through a
minimum of losses and optimal profits,
95
only a variable component of remuneration
may support such goal.
3.2 Guaranteed variable remuneration
Under the EU Directive, guaranteed variable remuneration does not promote "sound
risk management" and shall only be paid in exceptional circumstances,
96
such as the
employment of new staff and only during the first year, if the bank is financially
stable.
97
However, the FCA takes a different approach and permits guaranteed
variable remuneration if two conditions are met,
98
(1) an employee's variable
component of remuneration amounts less than 33 per cent of his total
remuneration,
99
and (2) the employee's total remuneration is below GBP500,000.
100
If both conditions are met, guaranteed variable remuneration may be paid in any
circumstances, not only for recruitment. This derogation may create new risks for the
stability of the financial market. Employees in their supervisory function for risk
management may be well remunerated in fixed components only. Such employees
can be influenced in their risk assessment through added guaranteed variable
remuneration, which eventually could enable the whole risk management system in a
bank. The general principle, to remunerate in consistence with "effective risk
management",
101
may be circumvented by declaring the guaranteed variable
93
E D Solozhentsev, Risk Management Technologies: With Logic and Probabilistic Models (Topics
in Safety, Risk, Reliability and Quality) (Springer Verlag 2014) 180; Paul Sweeting, Financial
Enterprise Risk Management (Internal Series on Actuarial Science) (CUP 2011) 510.
94
SYSC 19D.3.18 G (3).
95
Solozhentsev (n 93) 180; Sweeting (n 93) 510.
96
CRD IV Article 94 (1)(d), 19D.3.44 R.
97
CRD IV Article 94 (e).
98
SYSC 19D.3.35 G (2)(a).
99
SYSC 19D.3.35 G (1)(a).
100
SYSC 19D.3.35 G (1)(b).
101
SYSC 19D.3.36 R.
11
remuneration to be paid based on other performance criteria, given that the
employee is influenced in his risk assessment function. Finally, this domestic
provision leads to the evasion of CRD IVs restorations, with negative effects on risk
control.
3.3 Remuneration committee
Banks are provided with the flexibility to set up a remuneration system appropriate for
their size and complexity of activities.
102
Different banks may have to comply with the
code in different ways. A larger bank with affluent or complex transactions cannot
choose,
103
but must create a remuneration committee ("the committee").
104
However,
smaller entities do not necessarily have to establish such a committee.
105
A bank is
considered to be small if its `management responsibilities map [is] no more than a
single sheet of paper'.
106
A "single sheet of paper" does not mean a single
document,
107
but may be a `folder (...) with several files or items in it'.
108
This
definition is inadequate and leaves room for determining whether or not a
remuneration committee has to be established. However, it is likely that a bank is
considered to be small if its gross total assets over a rolling period of five years are
GBP250 million or less,
109
its business lines are narrow,
110
and `does not rely on
group governance arrangements'.
111
This gives smaller banks more freedom and
protects them from extra administrative costs accompanying with a remuneration
committee.
102
SYSC 19D.2.2 G (1).
103
Different to CRD IV Article 95 (1); Commission (n 9) preamble recital (2); Commission (1) recital
(4).
104
SYSC 19D.3.12 R (1).
105
SYSC 19D.2.2 G (2).
106
SYSC 4.5.13 G (1).
107
SYSC 4.5.13 G (2).
108
SYSC 4.5.13 G (3).
109
SYSC 4.5.13 G (2)(a)(i); PRA, `Strengthening individual accountability in banking and insurance
responses to CP14/14 and CP26/14' (Policy Statement PS 3/15, PRA 2015)
<http://www.bankofengland.co.uk/pra/documents/publications/ps/2015/ps315.pdf> accessed 11
May 2016, 5, 2.14.
110
SYSC 4.5.13 G (2)(b).
111
SYSC 4.5.13 G (2)(c).
Details
- Pages
- Type of Edition
- Erstausgabe
- Year
- 2017
- ISBN (PDF)
- 9783960675754
- ISBN (Softcover)
- 9783960670759
- File size
- 8.9 MB
- Language
- English
- Publication date
- 2017 (February)
- Keywords
- Bank Remuneration Regulation Common Good Risk Limitation of remuneration European Union Legislation Legislation in Germany Legislation in the UK Financial system Industrial law
