Affected financial institutions and investment firms will need to overhaul the way they remunerate many of their highest-paid staff.
On 21 May, the European Banking Authority (EBA) published a consultation paper containing draft guidance on exactly who will be affected by the European Commission's proposed cap on bonuses for the highest-paid individuals within European financial institutions and investment firms. The release of the guidance follows the European Parliament's recent approval of the Capital Requirements Directive IV (CRD IV), the legislative instrument that contains the new bonus cap rules. Affected entities should consider the significant impact of these rules now, in anticipation of implementation as early as 1 January 2014.
Who will be affected by the new bonus cap rules contained in CRD IV?
The new rules will apply to individuals who are "material risk takers" within all credit institutions and investment firms that are (1) based in the European Economic Area (EEA), (2) non-EEA-based subsidiaries of institutions and firms with headquarters in the EEA, or (3) EEA-based subsidiaries of institutions and firms with headquarters outside the EEA. The guidance contained in the EBA's consultation paper suggests that an individual will be a "material risk taker" for the purposes of CRD IV if
What are the new bonus cap rules?
Once in force, CRD IV will apply to all bonus payments made to "material risk takers" other than payments due under existing contractual arrangements entered into before the draft CRD IV was first published on 27 June 2012. It introduces a maximum limit for bonus payments of 100% of an individual's basic salary. This cap can be raised to 200% of basic salary but only with shareholder approval, which it appears (although it is not entirely clear) will be required on an annual basis.
In addition, CRD IV specifies the following:
When will the rules come into force?
If CRD IV is approved by the European Council (as is expected) and published in the Official Journal of the European Union by 30 June 2013, the deadline for implementation in EEA member states will be 1 January 2014. Otherwise, the deadline will be pushed back to 1 July 2014.
What will the impact be?
The impact of these changes is expected to be considerable. Affected financial institutions and investment firms will need to radically overhaul the way they remunerate many of their highest-paid staff. Significant increases to base salary, the introduction of additional contractual allowances, and the increase of "fixed benefits" may all need to be considered. These rules may also deter some of the highest performers within non-EEA-headquartered organisations from moving to London or elsewhere within the EEA. Accordingly, there appears to be a real risk that, in seeking to constrain what it views as the excesses of the banking culture, the European Commission may damage the competiveness of the European Union's financial sector to the potential benefit of New York, Zurich, Hong Kong, and other major non-EEA financial centres around the world.
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