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Summary of the Report on National Implementation of CEBS High-level Principles for Remuneration Policies (June 2010)

Background

In April 2009, the Committee of European Banking Supervisors (CEBS) published the High-level Principles for Remuneration Policies (Rem. HLP), which were developed in collaboration with the Financial Stability Board (FSB), Basel Committee on Banking Supervision (BCBS), and Committee of European Securities Regulators (CESR). Financial institutions were expected to implement these principles by the end of Q3 2009. CEBS initiated an implementation study in 2010 to assess how supervisors and institutions have applied the Rem. HLP, using two questionnaires distributed among CEBS members. The study aimed to provide input for further CEBS follow-up work and to support the development of broader guidelines under CRD 3.

Main Findings of the Implementation Study

General Observations

• Progress made: Since the financial crisis, both supervisors and institutions have made considerable progress in implementing the Rem. HLP.
• Regulatory approach: Most countries have adopted a regulatory approach, supported by supervisory guidance.
• Transitional period: Some jurisdictions allowed a transitional period for institutions to renegotiate existing contracts.
• Learning process: Both institutions and supervisors are in a learning phase, with many working through different stages of implementation.
• Challenges: Supervisors face challenges in navigating multiple international guidelines, ensuring a level playing field, and applying proportionality consistently.

Scope and Proportionality

• Scope: The Rem. HLP apply to credit institutions, investment firms, fund management companies, and pension funds, with some including insurance companies.
• Proportionality: It is considered relevant in most countries, influenced by factors such as size, complexity, ownership, listing status, and risk management quality.
• Implementation methods: Some countries use self-assessment systems or numerical thresholds to determine the applicability of special remuneration rules. Others define detailed areas where proportionality applies, such as the role of remuneration committees and deferral periods.

Governance

• Management body role: In many countries, the management body has taken on a more supervisory role in remuneration policies.
• Remuneration Committees (Rem. Co.): These are common in larger and listed institutions, typically composed of non-executive and independent members.
• Differences: Variations exist due to national legal traditions and corporate governance models. Some countries integrate Rem. Co. into the management body, while others include executive members or internal functions.
• Review processes: Independent reviews of remuneration policies are usually conducted, often by internal audit or other control functions. However, more detailed information is needed on how these reviews are carried out.

Transparency

• Internal transparency: Generally not a priority for supervisors, as institutions have not faced major issues in this area.
• External transparency: Not assessed in detail due to the timing of the questionnaires before the 2009 annual reports were available.

Performance Measurement

• Risk-adjusted performance: Qualitative criteria are increasingly used in remuneration scorecards, with bonus pools often determined at the institutional or business line level.
• Risk adjustment: Some countries have started to incorporate ex ante risk measures, but techniques for difficult risks (e.g., liquidity) are still under development.
• Explicit mechanisms: Malus or clawback mechanisms (ex post risk adjustment) are not yet widely observed.

Structure of Remuneration

• Fixed vs. variable pay: Most countries follow the open criterion of a proportionate ratio, with some specifying relative limits based on seniority and business lines.
• Deferral of bonuses: Deferral structures are becoming more common, with longer deferral periods and risk-sensitive approaches emerging.

Home/Host Dimension

• Cross-border institutions: These often operate with a firm-wide remuneration policy, adjusted for local regulations and laws.
• Supervisory coverage: All institutions within a consolidated group should be covered, with local responsibilities for financial subsidiaries.
• Supervisory colleges: Not yet a focus for large cross-border institutions, but seen as useful for alignment and discussion.

Proposed Next Steps

• CEBS guidelines: The goal is to align remuneration practices with the CRD 3 and address discrepancies between supervisory requirements and institutional practices.
• Cooperation with FSB and BCBS: Further collaboration is needed for technical areas like performance measurement, risk adjustment, and remuneration structures.
• EU-specific work: Dimensions such as scope, proportionality, and home/host relationships will be addressed by CEBS in cooperation with CESR.
• Consultation timeline: The guidelines will be launched for consultation once CRD 3 is approved, with the final version published before its implementation.

Structure of the Report

• Chapter 1: Provides an overview of national regulatory and supervisory actions, including scope, proportionality, and home/host considerations.
• Chapter 2: Details the substance of the Rem. HLP, covering governance, transparency, performance measurement, and remuneration structure.

Key Points

• Implementation progress: Continuous and genuine, with a focus on governance and deferral mechanisms.
• Supervisory challenges: Include navigating multiple guidelines, ensuring consistency, and applying proportionality.
• Role of Rem. Co.: Increasingly involved with other internal functions, but internal reporting lines remain incomplete.
• Control functions: Generally compensated based on specific objectives, not business unit performance, though some allow for broader institutional performance-based remuneration.
• Future work: Emphasis on alignment with international standards, convergence among supervisors, and detailed guidelines for remuneration policies.

This report serves as a foundational document for CEBS to build upon in its ongoing work on remuneration policies and practices in the European financial sector.