19 February 2014
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on classes of instruments that can be used for the purposes of variable remuneration. These RTS are part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union.
The aim of these draft RTS is to ensure that instruments for variable remuneration reflect the credit quality of an institution and incentivise prudent risk-taking, hence making them appropriate for this purpose. They prescribe that the institutions' long-term interests be reflected in the classes of instruments used for variable remuneration -including additional Tier 1, Tier 2 and other instruments.
In particular, these draft RTS specify the classes of instruments that can be used for variable remuneration and introduce specific requirements for additional Tier 1, Tier 2 and other instruments. They define the write-down, write-up and conversion mechanisms for Tier 2 and other instruments.
To ensure a write down or conversion at going concern conditions, the draft RTS introduce for all instruments a uniform trigger event of 7% of the Common Equity Tier 1 capital and defines the respective mechanisms. Instruments must have a sufficient maturity to cater for deferral and retention arrangements and must be issued at market conditions. The draft RTS require that a significant portion of at least 60% be issued publicly or privately to other investors. If instruments are used for the sole purpose of variable remuneration a cap is set on the distributions paid out.
Background and next steps
Directive 2013/36/EU (CRD) sets out requirements concerning remuneration, which apply from 1 January 2014, and mandates the EBA to prepare RTS on classes of instruments within the meaning of Article 52 or 63 of Regulation (EU) No 575/2013, or other instruments which can be fully converted to Common Equity Tier 1 (CET1) instruments or written down, that in each case adequately reflect the credit quality of the institution as a going concern and are appropriate to be used for the purposes of variable remuneration. Institutions must award at least 50 % of the variable remuneration of staff whose professional activities have a material impact on the institution's risk profile, in instruments. According to Article 94(1)(l) CRD the instruments must consist of a balance of (i) shares, share-linked or equivalent non-cash instruments and, (ii) where possible, Additional Tier 1, Tier 2 or other instruments, subject to the conditions set out in the CRD and these draft RTS.
These draft RTS have been sent to the European Commission for their adoption and will enter into force after their publication in the Official Journal of the European Union.