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    EBA Proposes Governance and Remuneration Guidance for Investment Firms

    December 17, 2020

    EBA is consulting on the guidelines on internal governance and remuneration policies under the Investment Firms Directive, or IFD. The guidelines specify the governance and remuneration provisions that Class 2 investment firms should comply with, taking into account the proportionality principle. The draft guidelines apply at both the individual and consolidated levels. EBA has been mandated to develop these guidelines under the Investment Firms Directive. The consultation period for these guidelines is open until March 17, 2021. The amended guidelines on internal governance are expected to be applied as of June 26, 2021 while the publication of final guidelines on remuneration policies is expected before the end of June 2021.

    Guidelines on Internal Governance. In terms of the governance requirements for investment firms, the Investment Firms Directive emphasizes the responsibility of the management body for sound governance arrangements, the importance of a strong supervisory function that challenges management decision-making, and the need to establish and implement a sound risk strategy and risk management framework. The EBA guidelines on internal governance complete the various governance provisions in the Investment Firms Directive, taking into account the principle of proportionality, by specifying the tasks, responsibilities, and organization of the management body and the organization of investment firms, including the need to create transparent structures that allow for supervision of all their activities. The guidelines also specify requirements aimed at ensuring the sound management of risks across all three lines of defense and, in particular, set out detailed requirements for the second line of defense (the independent risk management and compliance function) and the third line of defense (the internal audit function). The consultation paper provides details on the establishment of a risk culture, a code of conduct, and the management of conflicts of interest, also in relation to related parties’ transactions to ensure that firms have appropriate decision management and oversight processes for such transactions. 

    Guidelines on Remuneration Policies. The Investment Firms Directive mandates EBA to develop guidelines on remuneration policies for all staff as part of investment firm’s internal governance arrangements, remuneration policies for identified staff, and guidelines that facilitate the implementation of waivers by member states. Remuneration policies must be gender-neutral and respect the principle of equal pay for male and female workers for equal work or work of equal value. These guidelines further specify the application of the remuneration requirements and the principle of proportionality. The 2015 EBA guidelines on remuneration policies, which have been applicable for credit institutions and investment firms, form the basis for these guidelines. To a large extent these guidelines are aligned with the guidelines on remuneration policies under the Capital Requirements Directive, or CRD, to ensure a level playing field and cross-sectoral consistency. The draft guidelines apply at both individual and consolidated levels. Certain parts of the guidelines are applicable to all staff, ensuring that investment firms have in place sound and gender neutral remuneration policies, while other parts of the guidelines focus on specific provisions applicable for the remuneration policies for identified staff. 


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    Comment Due Date: March 17, 2021

    Keywords: Europe, EU, Banking, Securities, IFD, Governance, ESG, Remuneration, Proportionality, Investment Firms, CRD, EBA

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