The European Banking Authority (EBA) published report on the application of the guidelines on the remuneration of sales staff. The guidelines have been in force since 2016. EBA assessed how a sample of 70 financial institutions from 12 member states are applying these guidelines. The analysis focused on institutions’ internal arrangements for designing, approving, and monitoring the remuneration policy and practices for sales staff, in particular the practices for awarding variable remuneration to sales staff. The EBA assessment revealed that financial institutions focus more on prudential requirements and commercial interests than on meeting the interests of consumers. However, EBA also identified good practices that are considered to be compliant with the guidelines.
The assessment shows that, in terms of governance structures, the design, approval, and monitoring of the remuneration policies and practices are often handled by the same function, thus increasing the risk of an inaction bias when reviewing the remuneration policies and practices. However, EBA also identified 17 distinct good practices that are considered as compliant with the guidelines, with it being a good practice for financial institutions to:
- Involve their human resources, compliance, and risk management functions in the design of the policies
- Involve shareholders before granting variable remuneration in excess of 100% of fixed remuneration
- Apply a mix of quantitative and qualitative criteria when determining the variable remuneration of sales staff
- Not consider sales performance as the determining criterion for the promotion of staff
- Implement measures that explicitly "disincentivize" sales staff from acting in a way that gives rise to consumer detriment
- Include in the key performance indicators that determine variable remuneration some measurements of customer satisfaction or, conversely, customer detriment
- Establish a "gatekeeper provision"— that is, reduce or forfeit the variable remuneration of sales staff when they acted to the consumer’s detriment
- Ensure that payout curves for variable remuneration do not set incentives to maximize sales at a specific point
Regarding the awarding of variable remuneration, institutions should be more mindful of incorporating consumer interest in the procedures to grant such remuneration. As such, it may not be enough not to set any incentives for sales staff to act to the consumers’ detriment, but instead it could be beneficial to set disincentives to do so. Furthermore, when it comes to monitoring residual risk for consumer detriment, EBA is of the view that institutions can and should do more to implement appropriate and specific control mechanisms. The report also notes that differences in application may also be traced back to the different regulatory requirements applying to each kind of institution. The EBA and relevant competent authorities plan to continue to monitor how institutions apply these and whether they make use of the good practices identified in this report.
Keywords: Europe, EU, Banking, CRD, Governance, Remuneration, Operational Risk, Basel, Guideline, EBA
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