Draft Comment Letter on the EBA's Draft RTS on the Investment Firm's Review: Comments Requested by August 28
[32705]
August 25, 2020
TO: ICI Global Regulated Funds Committee RE: Draft Comment Letter on the EBA's Draft RTS on the Investment Firm's Review: Comments Requested by August 28
As we previously informed you,[1] in early June, the European Banking Authority (EBA) published for consultation two sets of Regulatory Technical Standards related to the remuneration rules under the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR).[2] The EBA also issued a roadmap on investment firms outlining its approach to the numerous mandates it received under the IFD/IFR.[3] The EBA intends to submit the final draft RTS to the European Commission in December 2020 and it is expected that they will be adopted in March 2021 and published in June 2021, shortly before the IFD comes into force on June 26, 2021.
Below please find a brief summary of the consultations and the comments we propose to make. We have prepared the attached comment letter based on our discussions with members. Please provide your feedback by COB Monday, August 31 to emykolenko@ici.org (we can also set up a time to talk if you’d prefer that over providing written feedback). Comments on the consultations are due to the EBA by September 4, 2020.
Draft RTS on Identification of Material Risk Takers for Remuneration
The IFD requires investment firms to identify all staff whose professional activities have a material impact on the investment firm’s risk profile or assets under management. The EBA’s draft RTS lay out a common set of criteria that must be applied to identify such staff (referred to as “identified staff” or “material risk takers”). Modeled after the prescriptive approach for identifying material risk takers applied under the CRD IV RTS and the draft CRD V RTS, investment firm staff can qualify as material risk takers by meeting either quantitative or qualitative thresholds.
Qualitative Criteria. The qualitative criteria aim to identify staff in key areas and functions whose impact on the firm’s risk profile, in EBA’s view, will always be material, as well as staff with the authority to take risks above thresholds defined based on the investment firm’s capital figures or assets that it manages. Specifically, all members of the management body or senior management must be identified. In addition, staff with managerial responsibility for certain functions, including money laundering and terrorist financing, economic analysis, outsourcing, and IT/information (where that role relates to the safeguarding of assets or client money, or the execution of client orders or trading activities) are within scope. The EBA specifies that the qualitative criteria are not exhaustive and that firms will need to continue to consider whether other categories of staff, not caught by the qualitative criteria, may nevertheless have a material impact on the firm’s risk profile and therefore need to be identified as material risk takers.
Quantitative Criteria. Levels of remuneration are used for identifying staff based on quantitative criteria. The EBA notes that, where individuals are awarded very high total remuneration, this is usually linked to the impact of their professional activities on the investment firm’s risk profile or the assets it manages. The quantitative criteria proposed in the draft RTS are set at the same level as those that will apply to banks under the new CRD V proposal, which the EBA proposes for cross-sectoral consistency. The quantitative criteria include, (1) staff earning more than the higher of €500,000 and the average level of pay for the management body and senior management, (2) staff earning more than €750,000, (3) for firms of 1,000 staff or more, staff that are in the top 0.3% of earners, and (4) staff whose remuneration is equal to or greater than the lowest total remuneration of certain staff included under the qualitative criteria. Staff earning up to €750,000 may be excluded if the investment firm determines that the relevant staff member does not in fact have a material impact on risk. Excluding staff earning more than €750,000 requires approval from the local regulator, while exclusions for staff earning more than €1,000,000 requires approval from the EBA, which will be given only in “exceptional circumstances.”
For investment firms that are part of a group, the criteria generally need to be applied at both the individual and group consolidated basis.
We propose the following in the draft letter:
Current position
Our analysis
Proposed amendments
Quantitative thresholds replicate CRD IV/V thresholds.
Not appropriate to investment firms and will result in many individuals being wrongly identified as MRTs.
Remove CRD IV/V quantitative thresholds that have no legal basis under the IFD.
If the first recommendation is not taken, use quantitative thresholds as indicators only and do not require regulatory approval for exclusion.
If prior regulatory approval is retained for those earning EUR 1 million or more, allow firms to demonstrate that the individual does not in fact have a material impact without having to demonstrate “exceptional circumstances.”
Article 6(1)(d) pulls into scope those earning the same or more as staff meeting specified qualitative criteria.
Because some qualitative staff are lower earners, may result in many individuals being wrongly identified as MRTs.
Carve out those only caught because they are voting members of committees referred to in Articles 5(7) and 5(9).
Draft RTS on Instruments for Investment Firms Remuneration
The IFD requires that 50% of the variable pay of material risk takers be made in “instruments.”[4] National competent authorities may approve the use of “alternative arrangements fulfilling the same objectives” if an investment firm does not issue any of the specified instruments. The draft RTS define the (1) Additional Tier 1 and Tier 2 instruments that may be used and (2) categories of instruments that may be used as “alternative arrangements fulfilling the same objectives.”
The draft RTS define classes of instruments that can be sued as additional Tier 1 instruments and Additional Tier 2 instruments very similarly to how they are defined under the current CRD IV regime. A very limited number of CRD IV institutions use Additional Tier 1 and Tier 2 instruments, and we believe that these provisions are not relevant for most investment firms. The EBA states that no firms currently use any arrangements that it would view as being “alternative arrangements.” We therefore understand that these provisions are also of limited relevance to investment firms and do not propose to comment on the text of the draft RTS themselves.
However, the consultation on the RTS on Instruments includes the assumption that “institutions will have to comply with the RTS with regard to the remuneration awarded for the performance year 2021.” In the draft letter, we acknowledge that Article 67 of the IFD requires Member States to have transposed the IFD into domestic law by June 26, 2021, but state our disagreement that firms should be required to comply with the IFD requirements from that date because the RTS will not be finalized until shortly before that date and it would be impractical and difficult to introduce the rules in the middle of a performance year.
We propose the following in the draft letter:
Current Position
Our analysis
Proposed amendments
MRT RTS (and, by association, remuneration rules under the IFD generally) apply from June 26, 2021.
Likely to result in firms not having time to review, implement and apply the RTS adequately when the RTS will likely be issued shortly before June 26, 2021.
Apply to first full performance year commencing on or after June 26, 2021.
Unclear what rules should apply during the timing gap to firms that will be subject to the IFD on a solo basis.
There is no legislative basis for applying CRD V during the timing gap given it will not apply when bonuses are awarded/paid out.
Roll-out transitional provisions, most efficient of which will be to require firms to continue applying their existing regimes until the first full performance year commencing on or after June 26, 2021.
Eva M. Mykolenko
Associate Chief Counsel - Securities Regulation
endnotes
[1] See ICI Memorandum 32572, available at https://www.iciglobal.org/iciglobal/pubs/memos/ci.memo32572.global.
[2] The draft RTS on identification of material risk takers for remuneration are available at https://eba.europa.eu/sites/default/documents/files/document_library/Publications/Consultations/2020/CP%20on%20RTS%20on%20IS%20under%20IFD/884631/EBA-CP-2020-09%20CP%20on%20RTS%20on%20IS%20under%20IFD.pdf and the draft RTS on instruments for investment firms remuneration are available at https://eba.europa.eu/sites/default/documents/files/document_library/Publications/Consultations/2020/%20CP%20on%20RTS%20on%20instruments%20for%20IF%20remuneration/884630/EBA-CP-2020-08%20CP%20on%20RTS%20on%20instruments%20for%20IF%20remuneration.pdf.
[3] The roadmap is available at https://eba.europa.eu/sites/default/documents/files/document_library/Regulation%20and%20Policy/Investment%20firms/884436/EBA%20Roadmap%20on%20Investment%20Firms.pdf. The roadmap sets out the intentions of the EBA’s upcoming workplan to ensure transparency about the EBA’s work and expected timelines.
[4] “Instruments” are defined in the IFD as: (1) shares or equivalent ownership interests, subject to the legal structure of the investment firm concerned; (2) share-linked instruments or equivalent non-cash instruments, subject to the legal structure of the investment firm concerned; (3) Additional Tier 1 or Tier 2 instruments or Other Instruments which can be fully converted to Common Equity Tier 1 instruments or written down and that adequately reflect the credit quality of the investment firm as a going concern; and (4) non-cash instruments which reflect the instruments of the portfolios managed.