Annexes to COM(2010)286 - Report on the application by Member States of the EU of the Commission 2009/384/EC Recommendation on remuneration policies in the financial services sector (2009 Recommendation on remuneration policies in the financial services sector) - Main contents
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| dossier | COM(2010)286 - Report on the application by Member States of the EU of the Commission 2009/384/EC Recommendation on remuneration policies ... |
|---|---|
| document | COM(2010)286  |
| date | May 26, 2010 |
Meanwhile, similar provisions on remuneration policy were also introduced by Member States in the proposal for a directive on Alternative Investment Fund Managers ("hedge funds")[18].
Both proposals are currently being discussed in the Council and European Parliament.
5. CONCLUSION
NOTWITHSTANDING THE MOMENTUM TO EN gage a substantial reform in the area of remuneration policies provided by the crisis, only 16 Member State fully or partially applied the Commission Recommendation. Whilst six Member States are in process of adopting measures to promote the application of the Recommendation, there is still a relatively high number of Member States that did not initiate any measures or took unsatisfactory ones. Only seven Member States apply relevant measures across the financial services sector. The substantial differences of national implementation on an element as fundamental as the structure of the remuneration policy are worrying.
Further efforts are thus needed to deal with this problem. No successful reform can be engaged without a real culture change in the way the financial services sector decides to incentivise its staff (from employees to executives). Some financial institutions already expressed their opposition to a reform in this area and continue to perceive short term bonus culture as a distinctive competitive edge and the most profitable manner to incentivise their staff. In fact, financial institutions have a keen interest in perpetrating a short term bonus culture in order to maintain a highly flexible workplace[19]. Financial services employees will only change their risk behaviour if they know they will be assessed over a sufficiently long period of time and that their level of pay will be effectively reduced if they take excessive risks.
Notwithstanding the forthcoming legislation, supervisory guidance will be necessary to ensure a common approach within the EU. To ensure a global level playing field, supervisory convergence will also be required in the context of the Basel Committee.
As regards practices in financial institutions themselves, at this stage, it is difficult to assess if and to what extent financial institutions have, in practice, put into place sound remuneration policies. It is too early and most of the regulatory changes are still ongoing. Though financial institutions have started to modify their remuneration practices, given their concerns about first-mover disadvantages, it is unlikely that they will commit to a long term overall remuneration policy reform until adoption of pending legislation in this area[20]. Although financial institutions are communicating externally and "tactically marketing" some remuneration policy changes, in particular for their directors[21], very little or no information is yet available or disclosed on individual remuneration at a lower level and on its structure.
On its side, the Commission intends to:
- propose similar legislative measure on remuneration in the non banking financial services sector (insurance, UCITS) in the course of 2010/early 2011;
- ensure that Member States and the European Parliament find a swift agreement on the pending legislative proposals that deal with remuneration issues and commit to a strict monitoring of their future implementation by Member States;
- ensure that, through its participation to the FSB and G20, an effective application of similar rules on remuneration policy in the financial services sector is taking place at global level to provide a level playing field on this issue;
- re-examine the situation regularly and reserve the right to come with any additional measures, as required.
[1] In 2008, a Counterparty Risk Management Policy Group III (CRMPG III) formed in the US to analyse the credit market crisis concluded in its report that compensation schemes in the financial services were one of five primary driving forces of the financial crisis. CRMPG III stressed the need for properly aligning compensation incentives with the long term interests of the financial institution and for discouraging short-run excesses in risk taking. At EU level, de Larosière report came to the same conclusion when it recommended to focus on the structure of remuneration policy in the financial services sector and to "re-align compensation incentives with shareholder interests and long-term, firm-wide profitability" .
[2] Commission Communication of 4 March 2009 to the Spring European Council, "Driving European Recovery" - COM(2009) 114.
[3] G20 Summit conclusions, London, 2 April 2009, paragraph 15.
[4] Commission Recommendation 2009/384/EC on remuneration policies in the financial services sector (OJ L 120, 15.5.2009, p. 22).
[5] For a detailed description of the content of the Recommendation, please see the Commission staff working document SEC(2010) 671 that supplements this Report.
[6] For the purpose of this report, only Member States that adopted national measures in accordance with the Commission Recommendation will be analysed.
[7] COM(2009) 362. For more details see Section 4 of this report.
[8] IT indicated that they have some general principles on compensation related to the provision of investment services and activities that would apply to investment firms and asset management companies (joint Bank of Italy and Consob Regulation, issued on October 2007).
[9] Only for the 6 Italian major banks.
[10] SE nonetheless specified that "An employee whose actions can have a material impact on the risk exposure of the firm is defined in the following way: An employee belonging to a personnel category that, as a part of its assignment, exercises or can exercise a not insignificant influence on the firm's risk exposure" .
[11] In the UK, covered financial institutions are expected to include "People who perform a significant influence function for a firm (and should therefore have been approved to perform this function) and employees whose activities have, or could have, a material impact on the firm’s risk profile". Presumption is that an employee in the second category is a covered employee if their total expected compensation for 2009 is greater than £1million.
[12] Subject, in some cases, to the specific labour and/or fiscal law rules of third country in which the firms of the group operate.
[13] Spain argued that taking into account that i) remuneration policy has not shown to be a problem in Spain, and ii) the need to guarantee coherence with European legislative developments, they are waiting for the adoption of the relevant European Directives to implement them.
[14] There are other differences due to specific national provisions or in case of bailed financial institutions but they are more specific and limited in scope.
[15] COM(2009) 211, 30.4.2009.
[16] COM(2009) 362.
[17] See agreement found on 10 November 2009 during ECOFIN Council.
[18] COM(2009) 207, 30.4.2009.
[19] Short-term bonuses imply short tem employment contracts. Being able to reduce the number of employees any times a year, financial institutions enhance competition amongst staff and preserve the level of bonus pools as part of this culture of mobility.
[20] The recent IIF report states that though "Progress toward aligning compensation with the IIF/FSB Principles also was being made, much more work needed to be done. While a majority of the firms surveyed linked compensation to performance and used deferrals in compensation payouts, most faced challenges in aligning compensation to the risk time horizon of the revenue and in incorporating cost of capital and risk factors into the assessment of performance" .
[21] This includes self limitations or caps on bonuses or golden parachutes for top executives, substantial amount of money given to charity, etc.