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Summary of AFME's Response to CEBS Consultation Paper on Remuneration Policies and Practices (CP42)

Core Content

AFME has provided feedback on the CEBS consultation paper on remuneration policies and practices (CP42), focusing on the challenges and opportunities posed by the proposed guidelines. The response highlights the need for flexibility, consistency, and international cooperation in the regulation of remuneration across the European Economic Area (EEA) and beyond.

Main Points

1. Global Inconsistency

• The financial industry has moved quickly to align remuneration policies with FSB principles, but global regulatory differences may create competitive disadvantages for multinational firms.
• AFME suggests that international regulators should cooperate to reduce the burden of demonstrating compliance with different frameworks.

2. EEA Member States' Implementation

• AFME welcomes CEBS guidance on CRD3 but emphasizes the need for a flexible, less prescriptive approach to ensure a level playing field.
• A lead regulator should be appointed to coordinate the application of the proportionality principle across EEA subsidiaries, to avoid fragmented assessments of "Identified Staff."

3. Flexibility in Remuneration Policies

• Flexibility is essential for firms to design remuneration structures that support financial stability and risk management.
• AFME argues that overly prescriptive measures may inadvertently increase fixed costs, which could reduce competitiveness and hinder innovation.

4. Need for Phased Implementation

• The deadline for implementing CRD3 (1 January 2011) is too tight, especially since the final guidelines may not be published before December.
• AFME recommends a phased, "evolutionary" approach to implementation to allow firms sufficient time to adjust their remuneration structures and inform staff.

5. Ex-post Review of Guidelines

• AFME urges CEBS to set an ex-post review date for the guidelines to evaluate their effectiveness and unintended consequences.
• The review should occur before the April 2013 Commission review of CRD3, and include input from industry and stakeholders.

Detailed Comments

1. Which Remuneration

• AFME agrees that remuneration should not be structured to circumvent CRD3 requirements.
• However, overly prescriptive rules may limit firms' ability to reduce costs during economic downturns and could act as a barrier to entry for new firms.

2. Which Staff

• The Guidelines provide helpful guidance on identifying staff, but AFME suggests flexibility to exclude outliers at the lower end of the remuneration bracket.
• Firms should be allowed to assess Identified Staff at the consolidated group level, especially for large multinational entities, to reflect the group's risk profile and governance structure.

3. Group Context

• EEA Groups: AFME is concerned that CRD3 may apply globally to Identified Staff, putting EEA-headquartered firms at a disadvantage in non-EEA markets.
• Non-EEA Groups: Regulatory conflicts may arise, especially for firms with a lead regulator in a third country. Localisation of remuneration policies may make them less attractive for staff to transfer to the EEA.
• Activities outside CRD3: Firms with non-regulated activities should not be subject to CRD3 remuneration requirements, to maintain competitiveness.

4. Governance of Remuneration

• The Guidelines should clarify that fixed remuneration for supervisory functions can include share-based awards, as is common in the US.
• The Remuneration Committee should be allowed to approve compensation models for Identified Staff, but not necessarily for the highest paid individuals in the control function.

5. General Capital Requirements on Risk Alignment

• The section on general remuneration policy should be clearer, especially regarding pension policies.
• The requirement for guaranteed variable remuneration for new hires may be more prescriptive than necessary, affecting competitiveness in non-EEA jurisdictions.

6. Specific Requirements on Risk Alignment

• Ratio between fixed and variable remuneration: AFME supports the non-prescriptive approach, but firms should be able to justify unusual ratios.
• Cash v Instrument (4.4.2):
  • Kind of instruments: Variable remuneration linked to managed assets should be considered "equity-like" for alignment purposes.
  • Retention periods: Flexibility is needed to determine retention periods based on the risk profile and time horizon of the business.
  • Minimum portion of instruments: The 50% non-cash requirement should apply to total variable compensation, not just deferred elements, to align with FSB principles.
• Ex-post Risk Incorporation: AFME supports the ability to adjust or forfeit deferred compensation, but cautions against applying this in all cases, especially during material downturns in business performance.

7. Disclosure

• Quantitative disclosures should be confidential and only shared with supervisors to protect commercial confidentiality and individual privacy.
• A harmonized approach to disclosure across EEA and third-country regulators is needed to ensure consistency and avoid duplication.

Key Information

• CRD3 Implementation: Concerns over the timeline and complexity of implementation.
• Proportionality Principle: Should be applied at the group level to determine Identified Staff.
• Flexibility: Crucial for firms to design remuneration structures that reflect their specific risk profiles and business needs.
• Global Consistency: Alignment with FSB principles is necessary to avoid regulatory fragmentation and competitive distortion.
• Tax Considerations: The 50% non-cash requirement for variable compensation may have unintended tax consequences and reduce liquidity.
• Disclosure Confidentiality: Maintaining commercial confidentiality is important when disclosing remuneration packages not currently required to be public.