Banking pay under the spotlight…again
05 March 2015
If you’ve had trouble getting hold of anyone in the financial sector in the past few days, it might be because they’re engrossed in the European Banking Authority’s eagerly-awaited consultation on its guidelines for ‘sound remuneration policies’ across the EU. It might not sound like essential reading, but the proposed guidelines will mean major changes for banks and many asset managers operating within the EU.
If the guidelines are passed as proposed, the biggest impact will be felt by smaller firms – UK level 3 firms under the Financial Conduct Authority’s framework. For level 1 and 2 firms, the changes are less dramatic, although clarification of the treatment of allowances will undoubtedly impact some.
Most dramatically, the consultation proposes changes to the application of proportionality, which would mean that level 3 banks and asset managers (excluding BIPRU firms, which are outside the scope of the Capital Requirements Directive) will have to comply with the requirements of the Remuneration Code in full – including the requirements relating to bonus caps, deferrals, payment in instruments, retention periods and claw-backs. This will have a huge impact on smaller banks and impacted asset managers who were previously exempt from many of the rules.
A number of other areas may raise questions for firms. The section on fixed and variable pay has been extended significantly but some questions remain around some of the definitions included in the proposals, particularly concerning the treatment of some types of expatriate allowance. Elsewhere, changes to instrument requirements suggest that dividends could no longer be paid on shares during any deferral periods, whilst changes to guidance on shareholder involvement means that the process for shareholder sign off of the pay ratio may need to change considerably in some firms.
The consultation also clarifies that the appropriate period to meet requirements for the retention of variable remuneration paid in instruments should be one year, rather than the six months currently applied in the UK. If the firm is defined as ‘significant’ under the CRD, this retention period will be increased further for anyone who is part of the management body and senior manager group.
Firms that run long-term incentive schemes could be affected by proposals which suggest that performance-based LTIP awards will be counted towards the bonus cap in the year of vesting rather than in the year of award. This could mean that many LTIPs will have to be looked at carefully and the implications on the overall pay model within banks will need to be considered.
The EBA has said that it plans to finalise the guidelines late in 2015; the FCA and PRA will then have two months to say whether they intend to apply the guidance or not. The consultation is open until 4 June and the full details can be read here.
For more information contact me or your PwC advisor.
Office: +44 (0)20 7213 5168
Email: [email protected]