Tapestry’s Janet Cooper on regulatory developments affecting pay in financial services.
Since 2009, regulators around the world have been issuing regulations and guidance on how and what employees in financial services firms should be paid. For lawyers working in the area, staying on top of the changes is challenging; making sense of them and applying them in a global context is complex.
Remuneration practices were identified as a contributory factor in the global financial crisis, putting too much emphasis on short-term awards and rewarding risk-taking. Many countries have, over the last seven years, introduced requirements along the lines set out by the Financial Stability Board in its Principles for Sound Compensation Practices, to require variable remuneration to be deferred, paid in equity and subject to reduction or clawback. The G20 countries have all implemented remuneration regulations, but they are not the same. This means that any firm needs to consider, and keep up to date with, developments in each country where they have employees.
In the EU, pay in the financial services sector remains a political issue and a key focus of the European Commission and Parliament. As a result, there is now a ‘bonus cap’ for senior people in the banks. The big question is whether the bonus cap will be extended to a much broader range of financial services firms. This will be reviewed and determined by the Commission and may require EU legislation to resolve.
In an attempt to standardise how the EU’s remuneration regulations apply across the EU, the European Banking Authority (EBA) has issued guidelines, which will take effect on 1 January 2017. Key areas firms will need to review and which may require changes to remuneration are:
- No dividend and interest on unvested awards – most share plans currently allow for the payment of dividend equivalents when the awards vest. These plans may need to be amended.
- Fixed remuneration – although not significantly changed since 2015, the terms of the fixed allowances may need to be updated to comply.
- Performance criteria – must use an appropriate mix of internal and external, financial and non-financial, measures.
- Retention periods – in most cases must now be at least one year (currently six months).
- Shareholder approval – whether external shareholder approval will be required to allow the 200% bonus cap.
- Remuneration committees – whether additional remuneration committees will be required at subsidiary level and, if so, establishing them and their terms of reference.
Although the EBA’s guidelines are supposed to become effective in January, some countries, like Italy, have implemented them now. This means firms need to start to take action towards compliance with the new rules ahead of the year end.
The UK’s Treasury and Prudential Regulation Authority (PRA) also have initiatives that need to be considered:
- Linking bonuses to gender targets – HM Treasury has launched a charter aimed at the large banks and insurance companies to link bonuses to gender targets in senior management. A review was conducted by Jayne-Anne Gadhia, chief executive of Virgin Money, showing that although many firms were appointing women to the main board, women made up only 14% at the operating committee level. The charter does not prescribe what the gender targets should be, but the targets will have to be published. Nor do they say how much of the bonus or incentives should be linked to the targets. This charter is likely to be taken up by many firms to show their support of diversity in their firms. The question is, who will be the first firms to show their support?
- Buyout of variable remuneration – there is a concern that when employees change jobs they forgo their bonus with their old firm and are ‘bought out’ by the new firm, but that buyout is not subject to reduction if something happens in their old firm that, had they still been there, would have seen their bonus reduced. This does not happen very often, but it is something that the UK Parliamentary Commission on Banking Standards has asked to be addressed. The proposals will be difficult to operate and are currently being considered by the PRA, and will need to be considered in detail when finalised.
Key dates
The key developments in the sector will mean that terms of plans, employment contracts and communications will need to be reviewed and changed:
Date | Developments |
2016 | Financial Conduct Authority to consider further guidance on UCITS Remuneration Code in light of European Securities and Markets Authority (ESMA) guidelines. If so there will be a consultation on this |
Summer 2016 | European Banking Authority (EBA) expected to publish final version of guidelines on remuneration policies relating to retail banking products |
02/06/16 | Prudential Regulation Authority (PRA) consultation on supervisory statement on Solvency II (ie insurance and reinsurance) remuneration ends |
30/06/16 | Deadline for European Commission to submit report under Article 161 Capital Requirements Directive (CRD) IV on the application of remuneration requirements in CRD IV (following its consultation in October 2015) |
July 2016 | Expected PRA supervisory statement consultation of implementation of EBA guidelines. May include response to PRA consultation on buyouts of variable remuneration |
By 31/12/16 | European Commission report on gender diversity practices |
31/12/16 | Committee of European Banking Supervisors guidelines repealed and replaced with EBA guidelines |
01/01/17 | EBA guidelines on remuneration for CRD IV firms apply; ESMA final guidelines on the UCITS V Directive apply; ESMA amended guidelines for Alternative Investment Fund Managers Directive firms apply |
For more information, please contact:
Janet Cooper, partner, Tapestry
T: 020 3432 2556
E: janet.cooper@tapestrycompliance.com
Janet Cooper co-founded Tapestry Compliance in 2011 with former Linklaters colleague Bob Grayson. Tapestry is a multi-award-winning boutique law firm specialising in global incentives and share plans, and broader global HR matters, with a network of 100 law firms globally. Tapestry has the largest incentives team of any law firm in the UK.