Smaller investment firms may not be subject to the hotly contested bonus cap already imposed on European banks, the European Banking Authority has said.
In December 2015 the EBA – the EU’s financial regulatory agency – recommended a new categorisation and prudential regime for Mifid investment firms. The discussion paper also proposed that fund groups under the Capital Requirements Directive should follow the same rules as banks, where bonuses are limited to twice employees’ fixed salary.
The decision was lambasted in the UK by the Bank of England, the FCA and the Investment Association. In February, the UK authorities told the ECB that they do not deem the move to be proportionate.
However, in a recently-issued opinion the EBA says the income-generating profile of lower risk investment firms would make the bonus cap unsuitable and would likely lead to a surge in fixed remuneration.
The EBA also confirmed it will introduce a three-tier regime. Systemically important investment firms, which carry out trading, will be categorised as class 1 and will face a more stringent regime under the Capital Requirements Directive V and Capital Requirements Regulation II.
Lower-risk investment firms will be categorised as class 2 and class 3 and will be subject to Mifid and the CRD remuneration framework. Class 2 firms will be those with more than €1.2bn of assets under management/advice and all firms holding custody assets or client money. All firms not included in Class 2 will be Class 3.
However, the implementation of the new legislation is not expected before 2020.
Under the EBA’s proposals, class 3 firms will face a new capital requirement matching either the fixed overheads requirement or an initial capital requirement of €75,000. Class 2 firms will be subject to the higher of the fixed overheads requirement, the initial capital requirement or the aggregate requirement produced by a new formula that considers customer, market and firm risks.
Law firm Ashurst says: “Many commentators in the UK may be forgiven a wry smile when they read this: the likely increase in fixed remuneration has been a key criticism of the bonus cap for banks and investment firms alike. The fact that this has been recognised by the EBA in relation to non-systemic investment firms is, at least, welcome.”
However, Ashurst warns investment firms remain at the mercy of the European.
“While the EBA’s stance on the bonus cap is encouraging, it still remains to be seen whether many investment firms will still, for a period at least, find themselves subject to the bonus cap under the revised Capital Requirements Directive V/ Capital Requirements Regulation II package which has been negotiated in the EU. Though, at the time of writing, the status and timing of this is still unclear, all firms will hope either that the application of the bonus cap to lower-risk businesses continues to be opposed by the UK or that the EBA’s evident scepticism that the cap should apply to Class 2 firms will be accepted by the Commission before a change, if any, under CRD V is required.”