EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD). One set of the regulatory standards addresses the criteria to identify all categories of staff whose professional activities have a material impact on the risk profile of an investment firm or the assets it manages (risk-takers). The other set of regulatory standards are on the classes of instruments that adequately reflect the credit quality of an investment firm and the possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration.
Regulatory Standards on Identification of Material Risk-Takers
The identification criteria in these standards constitute a combination of qualitative and appropriate quantitative criteria, with the aim to ensure that a sufficient level of scrutiny by investment firms and competent authorities is applied when identifying staff whose professional activities have a material impact on the investment firm’s risk profile or assets it manages. It is presumed that the staff with a high level of total remuneration have a higher impact on the risk profile or the assets it manages, compared to staff with significantly lower remuneration levels. Following the feedback received during the consultation phase, the qualitative criteria have been revisited to enhance the application of proportionality. The regulatory technical standards also clarify how the criteria should be applied on consolidated and individual bases. The standards also introduce some flexibility in calculating the amount of remuneration for the application of the quantitative requirements, similar to the remuneration framework applicable under the Capital Requirements Directive (CRD). In addition, the 0.3% of staff with the highest remuneration criterion has been included to be applied only by institutions that have more than 1000 staff members, with the intent to reduce the burden for small firms. The quantitative criteria are based on the rebuttable assumption that the professional activities of those members of staff would have a material impact on the risk profile of an institution.
Regulatory Standards on Instruments for Variable Remuneration
These regulatory standards introduce requirements for investment firms for Additional Tier 1, Tier 2, and other instruments used for the purposes of variable remuneration, to ensure that they appropriately reflect the credit quality of the investment firm; the standards also define, for Tier 2 and other instruments, the write-down, write-up, and conversion mechanisms. For Additional Tier 1 instruments, these mechanisms are defined by the Capital Requirements Regulation (CRR). The standards also set out requirements to ensure that the credit quality of investment firms is reflected in the instruments and that these instruments are appropriate for the purposes of variable remuneration. The link to credit quality as a going concern is established by introducing uniform minimum trigger events for write-down and conversion of Additional Tier 1, Tier 2, and other instruments. To ensure that different classes of instruments are appropriate for the purposes of variable remuneration, these instruments should provide appropriate incentives for staff to be prudent and long-term-oriented in their risk-taking. The provisions in the technical standards are aligned with Regulation 527/2014 on classes of instruments that are appropriate to be used for the purposes of variable remuneration under CRD; this helps to ensure that groups of credit institutions and investment firms are able to use a common set of instruments for remuneration purposes. EBA has reviewed the draft regulatory standards after three months of public consultation and has now submitted the draft standards to EC for adoption.
- Press Release
- Standards on Risk-Taker Identification (PDF)
- Standards on Remuneration Instruments (PDF)
Keywords: Europe, EU, Securities, Remuneration, IFD, IFR, Investment Firms, Proportionality, CRR, CRD, Regulatory Capital, EBA
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