Latest Shake-up of the Remuneration Provisions for Banks and Investment Firms Part 2: Banks and credit institutions

Authors: Mark Ife and Paul Ellerman

After over two years of debate, agreement has finally been reached on the proposed directive amending the Capital Requirements Directive (which is generally being titled CRD5), and the European Council has published its final text.

As detailed in our previous briefing, however, the proposed new prudential regime for investment firms, will remove most investment firms from the scope of CRD5 and subject them to the specific remuneration rules in the new Investment Firms Directive (IFD) and Investment Firms Regulation (IFR). Consequently, the revised CRD5 is likely only to apply to banks and “bank-like” investment firms.

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Latest Shake-up of the Remuneration Provisions for Banks and Investment Firms Part 1: Investment Firms

Authors: Mark Ife and Paul Ellerman

Agreement has now been reached between the European Parliament, the Commission and the Council on the final texts of two Directives which will impact on the remuneration provisions which apply to banks and investment firms. The first is the Investment Firms Directive (IFD), which will introduce a new prudential regime for investment firms. The second is the Directive which contains the fourth set of amendments to the Capital Requirements Directive (which is generally being titled CRD5). The European Parliament will consider both Directives in its plenary sessions between 15 and 19 April 2019.

This briefing sets out details of the remuneration provisions contained in the IFD and the related Investment Firms Regulation (IFR). A subsequent briefing will cover the revised provisions contained in CRD5.

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Australia: Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Report) was released to the public on 4 February 2019. The Federal Government has agreed to take action on all 76 recommendations contained in the Hayne Report, and in a number of areas has indicated it intends to go further, including conducting an immediate review of financial counselling services.  Herbert Smith Freehills have prepared a briefing paper which identifies the following key themes and reforms contained within the Hayne Report:

  1. Governance overhaul – Boards will need to exercise greater scrutiny over their governance systems, policies and procedures;
  2. Conflicts – a number of the changes proposed are designed to alter the objective from one of ‘managing’ to one of ‘eliminating’ conflicts of interest;
  3. Individual accountability – the proposed changes to remuneration and accountability regimes are significant, with individuals to be held to account more than ever before for the adequacy of complex systems, policies and procedures;
  4. Principles not prescription – the Hayne Report observes that prescriptive laws which are vast and complex may be less effective than statements of broad matters of principle, suggesting that now may be an apt time to revisit the current approach to regulation of the provision of financial services within Australia;
  5. Enforcement revolution – above all, the Hayne Report recommends greater personal accountability coupled with stronger regulators with an incentive to investigate and hold wrongdoers to account, making for an ‘enforcement revolution’. Organisations which do not proactively seek to identify and address inadequacies in their systems will likely find themselves redirecting resources toward activities which will do little to enhance their reputations or shareholder wealth.

The briefing paper considers in detail the key changes recommended in the Hayne Report and what these changes will mean for businesses and the Australian financial services landscape.

SFC publishes findings and guidance on protection of client assets following reviews of brokers’ internal controls and supervision of account executives

Last month, the Securities and Futures Commission (SFC) published a circular, a report and a self-assessment checklist to provide guidance on the standards expected of licensed corporations (LCs) regarding internal controls for the protection of client assets and supervision of account executives (AEs). For our full briefing, please click here.

European Commission forges ahead with bonus cap for all CRDIV firms

The European Commission has published proposed amendments to the remuneration requirements of CRDIV which would have the effect of extending the cap on variable remuneration (the "bonus cap") to all CRDIV firms, including smaller banks and all CRDIV investment firms.  In addition, the proposal would limit the firms which are able to disapply the "Pay Out Process Rules" (requiring deferral and payment in instruments), a change which could primarily affect UK banks with assets of between €5bn and £15bn, as well as materially limiting the ability for firms to waive those requirements in respect of relatively lower paid staff.

Please click here to read the full briefing.

UK: FCA and PRA final rules on regulatory references: strengthening accountability in banking and insurance

The FCA and PRA have published new policy statements relating to regulatory references under the new accountability regimes for banks and insurers, which will come into force on 7 March 2017 (see FCA PS16/22 and PRA PS27/16).

Banks and insurers will have to comply with the new rules in the policy statements for all candidates being recruited to senior management functions, senior insurance management functions, FCA-controlled functions or significant harm functions from that date onwards.

The change will coincide with the implementation of the full certification regime and application of Conduct Rules to “other conduct staff”.

Please see our full briefing here for analysis of how this new regime will work in practice.

 

PRA and FCA updated guidance on CRDIV remuneration rules

The PRA and FCA have each issued consultation papers setting out draft updated guidance in respect of the CRDIV remuneration rules.

The proposed updates from the PRA, available here, will consolidate the various existing PRA guidance documents into one, and provide further guidance on the Remuneration Part of the PRA Rulebook, which is applicable to all dual-regulated CRDIV firms.

The FCA consultation, available here, proposes amendments to the FCA guidance on the SYSC 19A Remuneration Code (applicable to CRDIV firms regulated by the FCA only) and the SYSC 19D Remuneration Code (to which dual-regulated CRDIV firms are subject in addition to the Remuneration Part of the PRA Rulebook). The FCA consultation also provides draft "FAQs" addressing certain common issues.

The consultations are open for response until 28 November 2016.  To read more from our employment and incentives team, click here.

UK: A guide to the PRA’s proposals on the Solvency II remuneration rules

The PRA has issued a draft Supervisory Statement, containing guidance on how Solvency II remuneration rules are to be applied (Draft Guidance).  The Draft Guidance is, in certain respects, materially more onerous than may have been expected.  In particular, it provides that firms must ensure that at least 40% of the variable remuneration of senior staff and other "risk takers" is deferred for at least 3 years, allowing all or part of the deferred element to be withheld.

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EU: Final ESMA Guidelines on UCITS V remuneration provisions: ESMA addresses the application of the proportionality principle under UCITS V and AIFMD

The European Securities and Markets Authority ("ESMA") has published its final guidelines on the remuneration requirements of the UCITS V directive (the "UCITS V Guidelines").  The key issue addressed by ESMA is the ability for smaller or less complex managers to disapply certain of the more onerous remuneration requirements (including the "Pay Out Process Rules") on the basis of the proportionality principle.

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