The European Banking Authority has published guidelines that set out ways in which firms might exempt themselves from the European Union's Capital Requirements Directive's 'remuneration principles.' They are to come into force on 1 January 2017.

In a garbled press release, the EBA says that its guidelines suggest that institutions should be correct and consistent in calculating a ‘bonus cap' (covered in many previous articles) by setting out specific criteria for 'mapping' (presumably this means categorising) all the components of remuneration into either fixed or variable pay (also see previous articles) and detailing the ways in which such things as allowances, sign-on bonuses, retention bonuses and severance pay are to be recognised (recorded as a revenue or expense item in a given accounting period) over time.

Clarity at stake

In particular, the guidelines set out something the EBA refers to as a 'governance process' for sound remuneration policies (pertaining, presumably, only to the firms and/or regulators that the directive covers) throughout the EU. The EBA evidently thinks that the guidelines (or perhaps the parts of the directive - it does not say) that do this are inadequate, as it goes on to say that it has had to draw up yet more guidelines to 'clarify' them. These extra guidelines are designed to help people to identify those categories of staff to whom this-or-that 'remuneration provision' of the directive applies, including the bonus cap. Alongside the guidelines (or perhaps in them - there is no clarity in the text on this point) the international regulatory co-ordinator has provided 'guidance' to govern the way in which firms should make deferral arrangements and "the pay-out instruments ensuring that variable remuneration is aligned with the institution's risk profile in the long-term and that ex-post risk adjustments can be applied as appropriate."

Proportionality - what is it?

The EBA's press release refers to 'proportionality' but never once does it explain what it means by the term, leaving the reader free to speculate. Since a court decision in 1970, EU law has interpreted it to mean that "the individual should not have his freedom of action limited beyond the degree necessary in the public interest." Another case in 1990 made the further stipulation that the lawfulness of a directive depended on whether it was appropriate and necessary to achieve the objectives legitimately pursued by the law in question. The directive does not come out with a definition either but Article 74 does say that a regulator might invoke it when making the duties of firms to prepare 'recovery plans' less onerous. The word 'proportionality,' then, is shrouded in value-judgments that appear to open the door to very vague standards and to court judgments that could go either way in many cases.

This is evidently what the EBA itself believes. Its message states that some (or perhaps all) of the EU's member-states allow courts (and perhaps others) to apply the doctrine in very different ways. It includes the waiving of 'requirements' (whosever those may be - perhaps the directive's, or perhaps every directive's) in this complaint and goes on to say that inconsistencies in proportionality between countries have led to an uneven playing-field for institutions all over the EU. The EBA states that, in its opinion (which it grandly prints with a capital 'O'), some unnamed party or other should pass laws to standardise things.

Muddy waters

The EBA wants someone (whom it does not identify) to consider a proposal from someone else (also not identified) for legislation to 'support' exemptions from the directive's remuneration principles 'on' the way people apply deferral arrangements (this could refer to deferred salaries) and pay-outs from instruments as long as certain factors are present. It looks forward to various requirements being 'disapplied' in the case of small and 'non-complex' (sic) institutions and for "staff that receives (sic) only a small amount of variable remuneration." It also seems to imply that it does not think that people should apply the bonus cap in a way that is subject to any exemption from the remuneration principles.

According to the EBA, nobody in the EU is allowed to apply waivers legally, presumably (although, again, its press release does not say this) in relation to the directive in question. It says that its guidelines remain neutral on this subject and that they refer to the general principle of proportionality to which the directive itself refers. It then uses language that makes it seem as though it believes that its opinions have lives of their own, stating that its opinion on unnamed parties passing laws "clarifies that the application of the so called ‘bonus cap' should not be subject to any exemption."

These EBA guidelines will apply on 1 January 2017. The Capital Requirements Directive to which they refer and from which they draw their legal force is the fourth in a row. It came partly into force in 2014.