The European Banking Authority consults to revise standards to identify staff with a material impact on the institution’s risk profile

Firms in scope: EU regulated banks, building societies and Category 1 investment firms*

*Investment firms which are not categorised as systemically important and exposed to the same types of risks as credit institutions will become subject to the new Investment Firm Directive and Regulation.

Timing: On 19 December 2019, the European Banking Authority (EBA) launched a public consultation on draft Regulatory Technical Standards (RTS) on the criteria to identify all categories of staff whose professional activities have a material impact on the institution’s risk profile. The consultation will close on 19 February 2020.

Update: Article 94(2) of CRD V mandates the EBA to develop draft RTS to set out criteria to define: (i) managerial responsibility and control functions; (ii) material business unit and significant impact on the relevant business unit’s risk profile; and (iii) other categories of staff not expressly referred to in Article 92(3) whose professional activities have an impact on the institution’s risk profile.

The EBA has developed the draft RTS on this basis and is now consulting for a period of two months. The draft RTS would replace the existing RTS in this area.

The qualitative criteria which have been set out in Regulation (EU) No 604/2014 have been retained to a large extent. However, some of the criteria have been revised taking into account supervisory experience since its entry into force in 2014 and the results of the EBA’s peer review of the RTS on identified staff.

The key changes include the following:

Qualitative criteria

• The core CRD V text states that all members of the management body and senior management, as well as staff members with managerial responsibility over the institution's control functions or material business units should be identified as Material Risk Takers.  On this basis, these categories are not included within the draft RTS.
• A definition of “managerial responsibility” is included within the draft RTS.  It applies when either of the following criteria applies:
  
  a. the staff member heads a business unit or a control function and is directly accountable to the management body as a whole or to a member of the management body or to the senior management;
  
  b. the staff member heads a subordinated unit or subordinated control function and reports to a staff member referred to in point (a).
• A definition of “material business unit” is included, which is a business unit, which meets either of the following criteria:
  
  a. it has been allocated internal capital of at least 2% of the internal capital of the institution or is otherwise considered by the institution as having a material impact on the internal capital requirements of the institution;
  
  b. it provides a critical function or a core business line as defined in Directive 2014/59/EU.  This includes business lines and associated services which represent material sources of revenue, profit or franchise value for an institution or the wider group.
• Some additional roles have been added to the qualitative criteria - staff with managerial responsibilities in the area of accounting procedures, the prevention of money laundering and terrorist financing, and staff managing outsourcing arrangements of critical or important functions shall be deemed to have a material impact on an institution's risk profile.
• “Control function” is defined as a function independent from the business units that it controls, which has a responsibility to provide objective assessment of risks, reporting or assurance. This includes, but is not limited to the risk management, compliance and internal audit functions.

Quantitative criteria

• A test to identify categories of staff who (i) receive remuneration equal to or greater than EUR 500 000 and equal to or greater than the average remuneration awarded to the members of the management body and senior management and (ii) performs professional activity within a material business unit, which is of a kind that has a significant impact on the relevant business unit's risk profile is included within the core text of CRD V (article 92 paragraph 3).  This is a slightly different test than previously.
• The draft RTS continue to include the current tests relating to individuals with total remuneration which is equal to or greater than EUR 750,000, and the staff member is within the top 0.3% of staff in terms of total remuneration.
• The quantitative criterion for identifying individuals with total remuneration equal to or greater than the lowest total remuneration awarded in that financial year to a member of senior management as set out in Regulation (EU) No 604/2014 has been removed.
• The draft RTS provide more clarity in relation to the definition of ‘exceptional circumstances’ under which the competent authority would give its approval to exempt individuals awarded total remuneration of EUR 1,000,000 or more.  It states that “exceptional circumstances” would entail a situation that is unusual and very infrequent or far beyond what is usual, and should relate to the staff member or category of staff concerned.

A link to the consultation paper on draft RTS on revised identified staff for remuneration purposes can be found here.