Updates to Remuneration Requirements for EU Investment Firms

By Panayiotis Antoniou,
CEO, MAP Risk Management Services Ltd (MAP RMS)

Proper remuneration policies help align employee interests with the long-term health of an organization. Such alignment discourages excessive risk-taking that could jeopardise the organization’s financial stability.

One of the main changes introduced by the Investment Firm Directive (IFD) framework for investment firms back in 2021 was its new remuneration requirements.

Following the transposition of the IFD into national law in Cyprus, Law 165(I)/2021 brought forward a set of remuneration principles and standards to be implemented and followed by Cyprus Investment Firms (CIFs).

Remuneration Policy Principles

As per the Law, an organization’s remuneration policy should:

1. Be clearly documented and reflect the company’s business operations, size and risk profile.
2. Be gender neutral and consistent with risk management procedures, while promoting effective risk management practices.
3. Be in line with business aims and set to prevent and avoid potential conflicts of interest, while encouraging risk awareness.
4. Be reviewed at least annually and approved by the company’s Board of Directors.
5. Comply with and adopt any national wage-setting rules.
6. Be able to clearly distinguish between fixed and variable remuneration and explain the procedures that must be established.
7. Be directly overseen by the Remuneration Committee.
8. Adhere to the proportionality principle, which means remaining proportionate to the size, internal structure, nature, scope and complexity of the organization’s activities.

Identified Staff

Further to the above principles, the Law requires the application of specific remuneration requirements to staff whose professional activities have a material impact on the organization’s risk profile, which are determined on the basis of a set of quantitative and/or qualitative criteria explained in detail as part of the Final Report on RTS (EBA/RTS/2020/05).

Specifically, in order to be recognised as an identified staff or material risk-taker, this individual would either be a member of the senior management, have managerial responsibilities, or be a part of a control function and receive a remuneration over EUR 750k or greater than EUR 500k where the remuneration is higher than the average remuneration paid out to the organization’s management body. As per the EBA’s Guidelines on Sound Remuneration Policies on IFD (EBA/GL/2021/13), all staff categories of material risk-takers should be identified by organizations in order to be able to apply the additional remuneration requirements to which they are subject to.

Variable Remuneration Provisions

With regards to variable remuneration requirements and as per the IFD, the following principles apply:

1. Variable remuneration should be decided based on a combination of assessments of the performance of the individuals, of the relevant business unit, and the firm’s overall results.
2. Variable remuneration policies should not incentivise any excessive risk-taking behaviour.
3. The bonus cap is abolished, and investment firms are now required to determine and set an appropriate ratio between fixed and variable remuneration.
4. At least 50% of the total variable remuneration of a person include non-cash items such as shares, other ownership instruments, share-linked instruments or equivalent non-cash instruments, and 40-60% of the variable remuneration awarded should be deferred over a 3–5-year period. *

*This does not apply to firms with total on-off balance sheet assets on average less than EUR 100 million and for staff whose annual variable remuneration does not exceed EUR 50k and that does not represent more than one fourth of that individual’s total annual remuneration.

Remuneration Committee

Another new feature is the requirement for investment firms (with an average on- and off-balance sheet assets of over EUR 100 million during the four years immediately preceding the given financial year) to establish a remuneration committee. The remuneration committee should be able to exercise competent and independent judgement regarding the firm’s remuneration policies and procedures, as well as the incentives created for managing risk and financial resources. Finally, the committee should also be gender balanced.

Remuneration Reporting

In terms of reporting requirements, CIFs are required by competent authorities to disclose remuneration data on their material risk-takers and details on their remuneration policies as part of the Disclosures and Market Discipline Report (Pillar 3), which should be publicly available on their websites on an annual basis within four months from the end of the financial year.

Remuneration Disclosures

Furthermore, CySEC has issued Circular C576 adopting the EBA’s guidelines on benchmarking exercises on remuneration practices, gender pay-gap, and the guidelines on data collection exercises regarding high earners. Therefore, CIFs with an initial capital requirement of EUR 150k or EUR 750k are required to submit the following data to CySEC each year:

1. Information on staff remuneration as set out in Annex I of the Guidelines on benchmarking exercises on remuneration practices and gender pay gap.
2. Details on remuneration for identified staff as set out in Annex II and Annex III of the Guidelines on benchmarking exercises on remuneration practices and gender pay gap.
3. Information on derogations as specified in Annex IV of the Guidelines on benchmarking exercises on remuneration practices and gender pay gap.
4. Data and information on high earners (defined as staff members earning a remuneration of at least €1 million in the financial year).

Remuneration and ICARA

Furthermore, firms should take into account the risks associated with inadequate remuneration policies and practices and the adverse effects that these may have on the organization. This way, firms will be able to appropriately assess and take proactive actions against these risks as part of the ongoing harms approach and/or stress testing of the ICARA process. Moreover, when determining remuneration policies for an investment firm, the organization’s overall capital and liquidity adequacy, as prescribed within the ICARA process’ outcomes, should be taken into account. Specifically, it is prudent for firms to analyse the financial resources maintained in relation to their risk exposures when deciding on an appropriate level of variable remuneration to be applied to staff, in order to ensure compliance with the applicable regulations, as well as the firm’s financial soundness at all times.

How MAP RMS Can Help

The MAP RMS team can assist investment firms in meeting remuneration requirements under Law 165(I)/2021 by helping develop and implement remuneration policies and practices. These policies must align with the firm’s size, risk profile, and business objectives, while adhering to the proportionality principle.

MAP RMS can support the identification and management of material risk-takers and ensure compliance with variable remuneration provisions, such as the appropriate ratio between fixed and variable remuneration and deferral requirements.

Contact us today to find out how we can assist you.