Remuneration Policies under CRD 4 – Correspondence on the Principle of Proportionality

The Chair of the European Banking Authority (the “EBA”) and the Acting Director General of the Directorate General for Justice and Consumers of the European Commission have exchanged correspondence in relation to the interpretation of the principle of proportionality with regards to remuneration policies under Article 92(2) of the amended Capital Requirements Directive (the “CRD”).

The first letter issued by the EBA provides the legal view of the EBA in relation to the remuneration policies set out in the CRD. The letter provides that the provisions relating to remuneration policies themselves are deemed to be proportionate and therefore even a partial waiver of same is not in line with the provisions of the CRD. The letter however also states that a waiver may be justified from a policy perspective for small and non-complex institutions where the incentive to take excessive risks by these institutions is practically non-existent. If a strict legal interpretation were to be applied, then the principle of proportionality would be constrained and the small and non-complex institutions with limited recourse to variable pay would suffer significant implementation costs which may be unnecessary.

In its reply, the Commission took the view that the relevant provisions of the CRD relating to remuneration policies apply to all institutions without distinction and that neither the national competent authorities nor the EBA have the power to decide that certain rules do not apply to certain institutions. It continued with its “strict” interpretative approach by stating that provisions laying down clear rules, such as those concerning deferral of variable remuneration, “leave no room for exceptions or exemptions” and therefore apply to all institutions irrespective of their size and internal organization and irrespective of their nature, scope and complexity of activities.

The divergence of views between the EBA and the Commission as evidenced above may be the subject of discussion for the upcoming review of the remuneration provisions in the CRD which are scheduled for mid-2016.