Excessive and imprudent risk-taking in the banking sector has led to the failure of individual financial institutions and systemic problems in Member States and globally. While the causes of such risk-taking are many and complex, there is agreement by supervisors and regulatory bodies, including the G-20 and the Committee of European Banking Supervisors (CEBS), that the inappropriate remuneration structures of some financial institutions have been a contributory factor. Remuneration policies which give incentives to take risks that exceed the general level of risk tolerated by the institution can undermine sound and effective risk management and exacerbate excessive risk-taking behaviour. The internationally agreed and endorsed Financial Stability Board (FSB) Principles for Sound Compensation Practices (the FSB principles) are therefore of particular importance.
(2)
Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (4) requires credit institutions to have arrangements, strategies, processes and mechanisms to manage the risks to which they are exposed. By virtue of Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (5), that requirement applies to investment firms within the meaning of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (6). Directive 2006/48/EC requires competent authorities to review those arrangements, strategies, processes and mechanisms, and to determine whether the own funds held by the credit institution or investment firm concerned ensure a sound management and coverage of the risks to which the institution or firm is or might be exposed. That supervision is carried out on a consolidated basis in relation to banking groups, and includes financial holding companies and affiliated financial institutions in all jurisdictions.
(3)
In order to address the potentially detrimental effect of poorly designed remuneration structures on the sound management of risk and control of risk-taking behaviour by individuals, the requirements of Directive 2006/48/EC should be supplemented by an express obligation for credit institutions and investment firms to establish and maintain, for categories of staff whose professional activities have a material impact on their risk profile, remuneration policies and practices that are consistent with effective risk management. Those categories of staff should include at least senior management, risk takers, staff engaged in control functions and any employee whose total remuneration, including discretionary pension benefit provisions, takes them into the same remuneration bracket as senior management and risk takers.
(4)
Because excessive and imprudent risk-taking may undermine the financial soundness of credit institutions or investment firms and destabilise the banking system, it is important that the new obligation concerning remuneration policies and practices should be implemented in a consistent manner and should cover all aspects of remuneration including salaries, discretionary pension benefits and any similar benefits. In that context, discretionary pension benefits should mean discretionary payments granted by a credit institution or investment firm to an employee on an individual basis payable by reference to or expectation of retirement and which can be assimilated to variable remuneration. It is therefore appropriate to specify clear principles on sound remuneration to ensure that the structure of remuneration does not encourage excessive risk-taking by individuals or moral hazard and is aligned with the risk appetite, values and long-term interests of the credit institution or investment firm. Remuneration should be aligned with the role of the financial sector as the mechanism through which financial resources are efficiently allocated in the economy. In particular, the principles should provide that the design of variable remunerationpolicies ensures that incentives are aligned with the long-term interests of the credit institution or investment firm and that payment methods strengthen its capital base. Performance-based components of remuneration should also help enhance fairness within the remuneration structures of the credit institution or investment firm. The principles should recognise that credit institutions and investment firms may apply the provisions in different ways according to their size, internal organisation and the nature, scope and complexity of their activities and, in particular, that it may not be proportionate for investment firms referred to in Article 20(2) and (3) of Directive 2006/49/EC to comply with all of the principles. In order to ensure that the design of remuneration policies is integrated in the risk management of the credit institution or investment firm, the management body, in its supervisory function, of each credit institution or investment firm should adopt and periodically review the principles to be applied. In that context, it should be possible, where applicable and in accordance with national company law, for the management body in its supervisory function to be understood as the supervisory board.
(5)
Credit institutions and investment firms that are significant in terms of their size, internal organisation and the nature, the scope and the complexity of their activities should be required to establish a remuneration committee as an integral part of their governance structure and organisation.
(6)
By 1 April 2013, the Commission should review the principles on remuneration policy with particular regard to their efficiency, implementation and enforcement, taking into account international developments including any further proposals from the FSB and the implementation of the FSB principles in other jurisdictions including the link between the design of variable remuneration and excessive risk-taking behaviour.
(7)
Remuneration policy should aim at aligning the personal objectives of staff members with the long-term interests of the credit institution or investment firm concerned. The assessment of the performance-based components of remuneration should be based on longer-term performance and take into account the outstanding risks associated with the performance. The assessment of performance should be set in a multi-year framework of at least three to 5 years, in order to ensure that the assessment process is based on longer term performance and that the actual payment of performance-based components of remuneration is spread over the business cycle of the credit institution or investment firm. To align incentives further, a substantial portion of variable remuneration of all staff members covered by those requirements should consist of shares, share-linked instruments of the credit institution or investment firm, subject to the legal structure of the credit institution or investment firm concerned or, in the case of a non-listed credit institution or investment firm, other equivalent non-cash instruments and, where appropriate, other long-dated financial instruments that adequately reflect the credit quality of the credit institution or investment firm. It should be possible for such instruments to include a capital instrument which, where the institution is subject to severe financial problems, is converted into equity or otherwise written down. In cases where the credit institution concerned does not issue long-dated financial instruments, it should be permitted to issue the substantial portion of variable remuneration in shares and share-linked instruments and other equivalent non-cash instruments. The Member States or their competent authorities should be able to place restrictions on the types and designs of those instruments or prohibit certain instruments, as appropriate.
(8)
To minimise incentives for excessive risk-taking, variable remuneration should constitute a balanced proportion of total remuneration. It is essential that an employee’s fixed salary represents a sufficiently high proportion of his total remuneration to allow the operation of a fully flexible variable remuneration policy, including the possibility to pay no variable remuneration. In order to ensure coherent remuneration practices throughout the sector, it is appropriate to specify certain clear requirements. Guaranteed variable remuneration is not consistent with sound risk management or the pay-for-performance principle and should, as a general rule, be prohibited.
(9)
A substantial portion of the variable remuneration component, such as 40 to 60 %, should be deferred over an appropriate period of time. That portion should increase significantly with the level of seniority or responsibility of the person remunerated. Moreover, a substantial portion of the variable remuneration component should consist of shares, share-linked instruments of the credit institution or investment firm, subject to the legal structure of the credit institution or investment firm concerned or, in the case of a non-listed credit institution or investment firm, other equivalent non-cash instruments and, where appropriate, other long-dated financial instruments that adequately reflect the credit quality of the credit institution or investment firm. In that context, the principle of proportionality is of great importance since it may not always be appropriate to apply those requirements in the context of small credit institutions and investment firms. Taking into account the restrictions that limit the amount of variable remuneration payable in cash and payable upfront, the amount of variable remuneration which can be paid in cash or cash equivalent not subject to deferral should be limited in order to further align the personal objectives of staff with the long-term interest of the credit institution or investment firm.
(10)
Credit institutions and investment firms should ensure that the total variable remuneration does not limit their ability to strengthen their capital base. The extent to which capital needs to be built up should be a function of the current capital position of the credit institution or investment firm. In that context, Member States’ competent authorities should have the power to limit variable remuneration, inter alia, as a percentage of total net revenue when it is inconsistent with the maintenance of a sound capital base.
(11)
Credit institutions and investment firms should require their staff to undertake not to use personal hedging strategies or insurance to undermine the risk alignment effects embedded in their remuneration arrangements.
(12)
Regarding entities that benefit from exceptional government intervention, priority should be given to building up their capital base and providing for recovery of taxpayer assistance. Any variable remuneration payments should reflect those priorities.
(13)
The principles regarding sound remuneration policies set out in the Commission Recommendation of 30 April 2009 on remuneration policies in the financial services sector (7) are consistent with and complement the principles set out in this Directive.
(14)
The provisions on remuneration should be without prejudice to the full exercise of fundamental rights guaranteed by the Treaties, in particular Article 153(5) of the Treaty on the Functioning of the European Union (TFEU), general principles of national contract and labour law, legislation regarding shareholders’ rights and involvement and the general responsibilities of the administrative and supervisory bodies of the institution concerned, as well as the rights, where applicable, of the social partners to conclude and enforce collective agreements, in accordance with national law and customs.
(15)
In order to ensure fast and effective enforcement, the competent authorities should also have the power to impose or apply financial or non-financial penalties or other measures for breach of a requirement under Directive 2006/48/EC, including the requirement to have remuneration policies that are consistent with sound and effective risk management. Those measures and penalties should be effective, proportionate and dissuasive. In order to ensure consistency and a level playing field, the Commission should review the adoption and application by the Member States of such measures and penalties on an aggregate basis with regard to their consistency across the Union.
(16)
In order to ensure effective supervisory oversight of the risks posed by inappropriate remuneration structures, the remuneration polices and practices adopted by credit institutions and investment firms should be included in the scope of supervisory review under Directive 2006/48/EC. In the course of that review, supervisors should assess whether those policies and practices are likely to encourage excessive risk-taking by the staff in question. In addition, CEBS should ensure the existence of guidelines for the assessment of the suitability of the persons who effectively direct the business of a credit institution.
(17)
The Commission Green Paper of 2 June 2010 on corporate governance in financial institutions and remuneration policies identifies a series of failures in corporate governance in credit institutions and investment firms that should be addressed. Among the solutions identified, the Commission refers to the need to strengthen significantly requirements relating to persons who effectively direct the business of the credit institution who should be of sufficiently good repute and have appropriate experience and also be assessed as to their suitability to perform their professional activities. The Green Paper also underlines the need to improve shareholders’ involvement in approving remuneration policies. The European Parliament and the Council note the Commission’s intention, as a follow-up, to make legislative proposals, where appropriate, on those issues.
(18)
In order further to enhance transparency as regards the remuneration practices of credit institutions and investment firms, the competent authorities of Member States should collect information on remuneration to benchmark remuneration trends in accordance with the categories of quantitative information that the credit institutions and investment firms are required to disclose under this Directive. The competent authorities should provide CEBS with that information in order to enable it to conduct similar assessments at Union level.
(19)
In order to promote supervisory convergences in the assessment of remuneration policies and practices, and to facilitate information collection and the consistent implementation of the remuneration principles in the banking sector, CEBS should elaborate guidelines on sound remuneration policies in the banking sector. The Committee of European Securities Regulators should assist in the elaboration of such guidelines to the extent that they also apply to remuneration policies for persons involved in the provision of investment services and carrying out of investment activities by credit institutions and investment firms within the meaning of Directive 2004/39/EC. CEBS should conduct open public consultations regarding the technical standards and analyse the potentially related costs and benefits. The Commission should be able to make legislative proposals entrusting the European supervisory authority dealing with banking matters and, to the extent it is appropriate, the European supervisory authority dealing with markets and securities matters, as established pursuant to the de Larosière process on financial supervision, with the elaboration of draft technical regulatory and implementing standards to facilitate information collection and the consistent implementation of the remuneration principles in the banking sector to be adopted by the Commission.
(20)
Since poorly designed remuneration policies and incentive schemes are capable of increasing to an unacceptable extent the risks to which credit institutions and investment firms are exposed, prompt remedial action and, if necessary, appropriate corrective measures should be taken. Consequently, it is appropriate to ensure that competent authorities have the power to impose qualitative or quantitative measures on the relevant entities that are designed to address problems that have been identified in relation to remuneration policies in the Pillar 2 supervisory review. Qualitative measures available to the competent authorities include requiring the credit institutions and investment firms to reduce the risk inherent in their activities, products or systems, including by introducing changes to their structures of remuneration or freezing the variable parts of remuneration to the extent that they are inconsistent with effective risk management. Quantitative measures include a requirement to hold additional own funds.
(21)
Good governance structures, transparency and disclosure are essential for sound remuneration policies. In order to ensure adequate transparency to the market of their remuneration structures and the associated risk, credit institutions and investments firms should disclose detailed information on their remuneration policies, practices and, for reasons of confidentiality, aggregated amounts for those members of staff whose professional activities have a material impact on the risk profile of the credit institution or investment firm. That information should be made available to all stakeholders (shareholders, employees and the general public). However, that obligation should be without prejudice to Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with the regard to the processing of personal data and on the free movement of such data (8).
(22)
In order to guarantee their full effectiveness and in order to avoid any discriminatory effect in their application, the provisions on remuneration laid down in this Directive should be applied to remuneration due on the basis of contracts concluded before the date of their effective implementation in each Member State and awarded or paid after that date. Moreover, in order to safeguard the objectives pursued by this Directive, especially effective risk management, in respect of periods still characterised by a high degree of financial instability, and in order to avoid any risk of circumvention of the provisions on remuneration laid down in this Directive during the period prior to their implementation, it is necessary to apply those provisions to remuneration awarded, but not yet paid, before the date of their effective implementation in each Member State, for services provided in 2010.
(23)
The review of risks to which the credit institution might be exposed should result in effective supervisory measures. It is therefore necessary that further convergence be reached with a view to supporting joint decisions by supervisors and ensuring equal conditions of competition within the Union.
(24)
Credit institutions investing in re-securitisations are required under Directive 2006/48/EC to exercise due diligence also with regard to the underlying securitisations and the non-securitisation exposures ultimately underlying the former. Credit institutions should assess whether exposures in the context of asset-backed commercial paper programmes constitute re-securitisation exposures, including those in the context of programmes which acquire senior tranches of separate pools of whole loans where none of those loans is a securitisation or re-securitisation exposure, and where the first-loss protection for each investment is provided by the seller of the loans. In the latter situation, a pool-specific liquidity facility should generally not be considered a re-securitisation exposure because it represents a tranche of a single asset pool (that is, the applicable pool of whole loans) which contains no securitisation exposures. By contrast, a programme-wide credit enhancement covering only some of the losses above the seller-provided protection across the various pools generally would constitute a tranching of the risk of a pool of multiple assets containing at least one securitisation exposure, and would therefore be a re-securitisation exposure. Nevertheless, if such a programme funds itself entirely with a single class of commercial paper, and if either the programme-wide credit enhancement is not a re-securitisation or the commercial paper is fully supported by the sponsoring credit institution, leaving the commercial paper investor effectively exposed to the default risk of the sponsor instead of the underlying pools or assets, then that commercial paper generally should not be considered a re-securitisation exposure.
(25)
The provisions on prudent valuation in Directive 2006/49/EC should apply to all instruments measured at fair value, whether in the trading book or non-trading book of institutions. It should be clarified that, where the application of prudent valuation would lead to a lower carrying value than actually recognised in the accounting, the absolute value of the difference should be deducted from own funds.
(26)
Institutions should have a choice whether to apply a capital requirement to or deduct from own funds those securitisation positions that receive a 1 250 % risk weight under this Directive, irrespective of whether the positions are in the trading or the non-trading book.
(27)
Capital requirements for settlement risks should also apply to the non-trading book.
(28)
Originator or sponsor institutions should not be able to circumvent the prohibition of implicit support by using their trading books in order to provide such support.
(29)
Without prejudice to the disclosures explicitly required by this Directive, the aim of the disclosure requirements should be to provide market participants with accurate and comprehensive information regarding the risk profile of individual institutions. Institutions should therefore be required to disclose additional information not explicitly listed in this Directive where such disclosure is necessary to meet that aim.
(30)
In order to ensure coherent implementation of Directive 2006/48/EC throughout the Union, the Commission and CEBS set up a working group (Capital Requirements Directive Transposition Group – CRDTG) in 2006, entrusted with the task of discussing and resolving issues related to the implementation of that Directive. According to the CRDTG, certain technical provisions of Directives 2006/48/EC and 2006/49/EC need to be further specified. It is therefore appropriate to specify those provisions.
(31)
Where an external credit assessment for a securitisation position incorporates the effect of credit protection provided by the investing institution itself, the institution should not be able to benefit from the lower risk weight resulting from that protection. This should not lead to the deduction from capital of the securitisation if there are other ways to determine a risk weight in line with the actual risk of the position, not taking into account such credit protection.
(32)
In the field of securitisation, disclosure requirements of institutions should be considerably strengthened. They should in particular also take into account the risks of securitisation positions in the trading book. Furthermore, in order to ensure adequate transparency regarding the nature of an institution’s securitisation activities, disclosures should reflect the extent to which the institution sponsors securitisation special purpose entities and the involvement of certain affiliated entities, since closely related parties may pose on-going risks to the institution concerned.
(33)
Specific risk charges for securitisation positions should be aligned with the capital requirements in the banking book since the latter provide for a more differentiated and risk-sensitive treatment of securitisation positions.
(34)
Given their recent weak performance, the standards for internal models to calculate market risk capital requirements should be strengthened. In particular, their capture of risks should be completed regarding credit risks in the trading book. Furthermore, capital charges should include a component adequate to stress conditions to strengthen capital requirements in view of deteriorating market conditions and in order to reduce the potential for pro-cyclicality. Institutions should also carry out reverse stress tests to examine what scenarios could challenge the viability of the institution unless they can prove that such a test is dispensable. Given the recent particular difficulties of treating securitisation positions using approaches based on internal models, institutions’ ability to model securitisation risks in the trading book should be limited and a standardised capital charge for securitisation positions in the trading book should be required by default.
(35)
This Directive lays down limited exceptions for certain correlation trading activities, in accordance with which an institution may be permitted by its supervisor to calculate a comprehensive risk capital charge subject to strict minimum requirements. In such cases the institution should be required to subject those activities to a capital charge equal to the higher of the capital charge in accordance with that internally developed approach and 8 % of the capital charge for specific risk in accordance with the standardised measurement method. It should not be required to subject those exposures to the incremental risk charge but they should be incorporated into both the value-at-risk measures and the stressed value-at-risk measures.
(36)
Article 152 of Directive 2006/48/EC requires certain credit institutions to provide own funds that are at least equal to certain specified minimum amounts for the three twelve-month periods between 31 December 2006 and 31 December 2009. In the light of the current situation in the banking sector and the extension of the transitional arrangements for minimum capital adopted by the Basel Committee on Banking Supervision, it is appropriate to renew that requirement for a limited period of time until 31 December 2011.
(37)
In order not to discourage credit institutions from moving to the Internal Ratings Based Approach (the IRB Approach) or Advanced Measurement Approaches for calculating the capital requirements during the transitional period due to unreasonable and disproportionate implementation costs, it should be possible to allow credit institutions which have moved to the IRB Approach or Advanced Measurement Approaches since 1 January 2010 and which have previously calculated their capital requirements in accordance with other less sophisticated approaches, subject to supervisory approval, to use the less sophisticated approaches as the basis for the calculation of the transitional floor. The competent authorities should monitor their markets closely and ensure a level playing field within all their markets and market segments and avoid distortions in the internal market.
(38)
In accordance with point 34 of the Interinstitutional Agreement on better law-making (9), Member States are encouraged to draw up, for themselves and in the interest of the Union, their own tables illustrating, as far as possible, the correlation between this Directive and the transposition measures, and to make them public.
(39)
The provisions of this Directive constitute steps in the reform process in response to the financial crisis. In line with the conclusions of the G-20, the FSB and the Basel Committee on Banking Supervision, further reforms may be necessary, including the need to build counter-cyclical buffers, ‘dynamic provisioning’, the rationale underlying the calculation of capital requirements in Directive 2006/48/EC and supplementary measures to risk-based requirements for credit institutions to help constrain the build-up of leverage in the banking system. In order to ensure appropriate democratic oversight of the process, the European Parliament and the Council should be involved in a timely and effective manner.
(40)
The Commission should review the application of Directives 2006/48/EC and 2006/49/EC to ensure that their provisions are applied in an equitable way which does not result in discrimination between credit institutions on the basis of their legal structure or ownership model.
(41)
The Commission should be empowered to adopt delegated acts in accordance with Article 290 TFEU in respect of technical adjustments to Directive 2006/48/EC to clarify definitions to ensure uniform application of that Directive or to take account of developments on financial markets; to align terminology on, and frame definitions in accordance with, subsequent relevant acts; to expand the content or adapt the terminology of the list of activities subject to mutual recognition under that Directive to take account of developments on financial markets; to adjust the areas in which the competent authorities are required to exchange information; to adjust the provisions of that Directive on own funds to reflect developments in accounting standards or Union legislation, or with regard to the convergence of supervisory practices; to expand the lists of exposure classes for the purposes of the Standardised Approach or the IRB Approach to take account of developments on financial markets; to adjust certain amounts relevant to those exposure classes to take into account the effects of inflation; to adjust the list and classification of off-balance sheet items; and to adjust specific provisions and technical criteria on the treatment of counterparty credit risk, the organisation and treatment of risk, the Standardised Approach and the IRB Approach, credit risk mitigation, securitisation, operational risk, review and evaluation by the competent authorities and disclosure in order to take account of developments on financial markets or in accounting standards or Union legislation, or with regard to the convergence of supervisory practices. The Commission should also be empowered to adopt delegated acts in accordance withArticle 290 TFEU in respect of measures to specify the size of sudden and unexpected changes in interest rates relevant for the purposes of the review and evaluation by the competent authorities under Directive 2006/48/EC of interest rate risk arising from non-trading activities; to prescribe a temporary reduction in the minimum level of own funds or risk weights specified under that Directive in order to take account of specific circumstances; to clarify the exemption of certain exposures from the application of provisions of that Directive on large exposures; and to adjust the criteria for the assessment by supervisors under that Directive of the suitability of a proposed acquirer for a credit institution and the financial soundness of any proposed acquisition.
(42)
The Commission should also be empowered to adopt delegated acts in accordance with Article 290 TFEU in respect of technical adjustments to Directive 2006/49/EC to clarify definitions to ensure uniform application of that Directive or to take account of developments on financial markets; to adjust the amounts of initial capital prescribed by certain provisions of that Directive and specific amounts relevant to the calculation of capital requirements for the trading book to take account of developments in the economic and monetary field; to adjust the categories of investment firms eligible for certain derogations to required minimum levels of own funds to take account of developments on financial markets; to clarify the requirement that investment firms hold own funds equivalent to one quarter of their fixed overheads of the preceding year to ensure uniform application of that Directive; to align terminology and definitions with subsequent relevant acts; to adjust technical provisions of that Directive on the calculation of capital requirements for various classes of risk and large exposures, on the use of internal models to calculate capital requirements and on trading in order to take account of developments on financial markets or in risk measurement or accounting standards, or in Union legislation, or which have regard to the convergence of supervisory practices; and to take account of the outcome of the review of various matters relating to the scope of Directive 2004/39/EC.
(43)
The European Parliament and the Council should have 3 months from the date of notification to object to a delegated act. At the initiative of the European Parliament or the Council, it should also be possible to prolong that period by 3 months. It should be possible for the European Parliament and the Council to inform the other institutions of their intention not to raise objections. Such early approval of delegated acts is particularly appropriate when deadlines need to be met, for example where there are timetables in the basic act for the Commission to adopt delegated acts.
(44)
In Declaration 39 on Article 290 of the Treaty on the Functioning of the European Union, annexed to the Final Act of the Intergovernmental Conference which adopted the Treaty of Lisbon, signed on 13 December 2007, the Conference took note of the Commission’s intention to continue to consult experts appointed by the Member States in the preparation of draft delegated acts in the financial services area, in accordance with its established practice.
(45)
Since the objectives of this Directive, namely to require credit institutions and investment firms to establish remuneration policies that are consistent with effective risk management and to adjust certain capital requirements, cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and effects of the action, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve those objectives.
(46)
Directives 2006/48/EC and 2006/49/EC should therefore be amended accordingly,
