Tag Archives: Eurovoc

Remuneration policies in the financial services sector

Remuneration policies in the financial services sector

Outline of the Community (European Union) legislation about Remuneration policies in the financial services sector

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Remuneration policies in the financial services sector

Document or Iniciative

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector.

Summary

This Recommendation sets out general principles applicable to remuneration practices in the financial services sector which aim at avoiding any excessive risk-taking in this sector, particularly by banks and investment firms.

The Recommendation applies to:

  • financial undertakings having their registered office or their head office in the territory of a Member State;
  • remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking.

The Recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.

Remuneration policy

Remuneration policy should be in line with the business strategy, objectives, values and long-term interests of the financial undertaking, such as sustainable growth prospects or the protection of clients and investors in the course of services provided.

The remuneration policy should be the result of a balance between fixed and variable components. The fixed component should represent a sufficiently high proportion of the total remuneration allowing the undertaking to operate a fully flexible bonus policy.

The structure of the remuneration policy should be updated regularly so that it corresponds to the development of the company.

In the event that remuneration is performance-related, it should be evaluated according to current or future risks without omitting to take into account the cost of the capital employed and the liquidity required.

The procedures followed should be clear and documented and internally transparent.

The (supervisory) board should establish the general principles of the remuneration policy of the financial undertaking and be responsible for its implementation.

Control functions, human resources departments and external experts should also be involved in the design of the remuneration policy.

Remuneration policy should, at least on an annual basis, be subject to central and independent internal review by control functions for compliance with policies and procedures defined by the (supervisory) board.

Disclosure

Information on the remuneration policy should be disclosed by the undertaking in the form of an independent statement or a periodic disclosure and should list:

  • information on the decision-making process which defines the remuneration policy chosen;
  • information on linkage between pay and performance;
  • performance measurement criteria;
  • the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;
  • the main parameters and rationale for any annual bonus scheme and any other non-cash benefits.

Supervision

The competent authorities should carry out supervisory activities and take into account when doing so parameters such as:

  • the size of the financial undertaking;
  • the nature of its activities;
  • the complexity of its activities.

Financial undertakings should, in addition, send the competent authorities a statement indicating the level of compliance with the principles given above concerning remuneration policy.

Context

Remuneration practices in the financial undertakings sector, particularly in banks and investment firms, have led to excessive risk-taking. These practices contributed, to a certain extent, to significant losses suffered by large financial undertakings and were, partly, at the origin of the October 2008 financial crisis. The Communication “Driving the European recovery”, published in spring 2009, presents a plan which aims at restoring and maintaining a stable and reliable financial system. This Recommendation on remuneration policies is part of the strategy proposed by the plan.

Related Act

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Report on the application by Member States of the EU of the Commission 2009/384/EC Recommendation on remuneration policies in the financial services sector [COM(2010) 286 final – Not published in the Official Journal].

This Report concerns the application of Recommendation 2009/384/EC in the different Member States.
It notes disparities in the application of the principles laid down in the Recommendation. At present, only 16 Member States have fully or partly applied the Recommendation and 7 Member States apply the measures advocated in the Recommendation across the financial services sector.
Moreover, the Report also notes the reluctance of financial institutions to modify their remuneration practices. These institutions are continuing to filter most of the information relating to their individual remuneration practices.

In view of these still considerable obstacles, the Commission intends to pursue the action undertaken and to contribute to the introduction of global rules on remuneration policy in the financial services sector within the context of the G20 and the FSB.

Regime for the remuneration of directors of listed companies

Regime for the remuneration of directors of listed companies

Outline of the Community (European Union) legislation about Regime for the remuneration of directors of listed companies

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Regime for the remuneration of directors of listed companies

Document or Iniciative

Commission Recommendation 2009/385/EC of 30 April 2009 completing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (Text with EEA relevance).

Summary

The existing Community framework is based on the principle of performance-based remuneration of directors of listed companies (hereinafter referred to as “directors”). This Recommendation aims at giving additional guidelines on the way in which best practices can be defined to prepare an appropriate remuneration policy. To this end, it deals with some aspects of the structure of the remuneration of directors and governance thereof.

Remuneration policy

Structure of the policy on directors’ remuneration

In order to ensure that remuneration is performance-related, the new Recommendation requires a balance to be established between fixed and variable remuneration and makes the allocation of the variable component conditional upon predetermined and measurable performance criteria.

In order to promote the long-term sustainability of companies, the new Recommendation also provides for:

  • a balance between long-term and short-term performance criteria;
  • deferment of payment of the variable component;
  • a minimum period for the vesting of share options and shares;
  • the retention of a minimum number of shares until the end of the mandate.

Termination payments (“golden parachutes”) are also subject to quantified limitations and should not be paid in the event of failure. It is suggested that payments do not exceed the equivalent of two years of the non-variable component of the remuneration.

The new Recommendation also introduces the principle of proportionality of remuneration within the company, namely a rating which compares the remuneration of directors to that of other executive directors on the board and employees or executives of the company.

As a last resort, companies should reclaim variable components of remuneration that are paid on the basis of data which later proves to be manifestly misstated.

Governance of the policy on directors’ remuneration

Disclosure of the policy on directors’ remuneration

This Recommendation is based on Recommendation 2004/913/EC which stipulates that each listed company must publish a statement on its remuneration policy. This Recommendation goes further by stating that this statement must be clear and easily understandable.

The statement on remunerations should also provide information on:

  • the choice of performance criteria;
  • the methods applied to determine whether performance criteria have been fulfilled;
  • the payment of variable components of the remuneration;
  • the payment of termination payments;
  • the vesting of share-based rights to remuneration;
  • the policy on the retention of shares;
  • the composition of peer groups of companies the remuneration policy of which has been examined in relation to the establishment of the remuneration policy of the company concerned.

Shareholders’ vote

In order to improve transparency, shareholders should participate in board meetings and use their voting rights with regard to directors’ remuneration.

Remuneration committees

Remuneration committees play a key role in establishing a responsible remuneration policy. In order to strengthen the functioning and responsibility of the remuneration committee, the Recommendation suggests that at least one of its members should have sufficient expertise in remuneration matters. Furthermore, the Recommendation contains an obligation for members of the remuneration committee to attend the board meeting at which the statement on remuneration is on the agenda in order to be able to provide explanations to shareholders. Finally, in order to avoid conflicts of interests for remuneration consultants, the Recommendation provides that consultants who advise the remuneration committee must not also advise other departments of the company.

Remuneration of non-executive directors or members of the supervisory board

In order to avoid conflicts of interests, the Recommendation provides that the remuneration of non-executive board members or members of the supervisory board should not include share options.

Context

The financial crisis of October 2008 revealed more and more complex remuneration structures. They are often based on short-term performance, which can lead to excessive remuneration of directors, not justified by performance. This Recommendation complements and strengthens Recommendations 2004/913/EC and 2005/162/EC which constitute the Community framework for the remuneration of directors of listed companies.

Related Act

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Report on the application by Member States of the EU of the Commission 2009/385/EC Recommendation (2009 Recommendation on directors´ remuneration) complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies [COM(2010) 285 final – Not published in the Official Journal].

This Report concerns the application of Recommendation 2009/385/EC in the different Member States. It emphasises that 10 Member States have already applied at least half of the recommendations. Moreover, some Member States are working on the implementation of several recommendations in their law or Corporate Governance Code. According to the Report, the Member States’ poor understanding of certain aspects of the Recommendation such as the concept of deferment or share based remuneration is the reason for this unsatisfactory implementation. The Commission therefore intends to improve the coherence and effectiveness of EU action in the area of the remuneration of directors of listed companies.

Packaged retail investment products

Packaged retail investment products

Outline of the Community (European Union) legislation about Packaged retail investment products

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Packaged retail investment products

Document or Iniciative

Communication from the Commission to the European Parliament and to the Council of 30 April 2009 – Packaged retail investment products [COM(2009) 204 final – Not published in the Official Journal].

Summary

This Communication presents the measures planned by the European Commission in the packaged retail investment products sector and more specifically in terms of mandatory information and commercial practices. The aim is bring the Community framework into line with market reality. In this regard, the Commission intends to introduce, at European level, a horizontal approach in the field of retail investment products.

Characteristics

Packaged retail investment products have the following points in common:

  • they offer exposure to underlying financial assets;
  • their primary function is capital accumulation;
  • they are designed with the mid- to long-term in mind;
  • they are marketed directly to retail investors.

These products include the following types:

  • investment (or mutual) funds;
  • investments packaged as life insurance policies;
  • retail structured securities;
  • structured term deposits.

Current weaknesses

Packaged retail investment products can be at the origin of risks where there is a sharp asymmetry in information and expertise between the manufacturers and distributors of products and retail investors.

Another main weakness of this type of product is related to the inconsistencies in the European regulatory framework in force. It is currently inadequate with regard to the retail investment market reality and is not able to offer investors a satisfactory level of protection.

The main failings of the Community framework for packaged retail investment products have their origin in the lack of key investor disclosures and in the regulation of commercial practices.

Proposals for a horizontal approach

Key investor disclosures

Information for retail investors should be harmonised and standardised as much as possible so that they are better able to compare products.

Key information made available to investors should comply with the following criteria:

  • be fair, clear and not misleading;
  • guide investors, enabling them to make informed investment decisions (performance, risks, charges, etc.);
  • be short and simple;
  • be provided at the right time.

Selling of packaged retail investment products by intermediaries and other distributors

The MiFID (Markets in Financial Instruments Directive) provisions are considered to be a benchmark on conduct of business and the management of conflicts of interest. The Commission suggests that the scope of MiFID be extended to all packaged retail investment products.

The horizontal approach governing the regulation of commercial practices would be based on the following principles:

  • investors should be fairly treated;
  • products sold should correspond to the profile and needs of the investor;
  • risks should be clearly communicated to the investor if they decide not to take advice;
  • conflicts of interest must not adversely affect investors;
  • investors should receive clear and effective disclosures of remuneration arrangements and all charges, commissions or fees paid;
  • those assessing the suitability of products should fully understand all their features.

It is still necessary however to establish a generic definition of the concept of “a packaged retail investment product”, and a clear designation of the products that fall within scope.

Context

This Communication is the result of work carried out following the request by the ECOFIN Council in May 2007, and has the aim of restoring confidence with regard to financial markets. It is part of the reforms launched by the European Union since the start of the financial crisis in October 2008. This demonstrated the importance of ensuring transparency in financial products and brought to light the disastrous consequences of irresponsible marketing.

Driving European recovery

Driving European recovery

Outline of the Community (European Union) legislation about Driving European recovery

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Internal market: general framework

Driving European recovery

Document or Iniciative

Communication for the spring European Council of 4 March 2009 – Driving European recovery – Volume 1 [COM(2009) 114 final – Not published in the Official Journal].

Summary

This Communication sets out different measures to be taken to trigger a recovery in Europe following the financial crisis which started in summer 2007 and which became large-scale in late 2008. It presents an ambitious programme which aims at:

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  • reforming the financial sector;
  • sustaining demand;
  • boosting investment;
  • retaining or creating jobs.

Restoring and maintaining the stability of the financial sector

The report presented by the De Larosière Group (pdf ), makes supervision the cornerstone of a stable financial system.

The European Commission intends to establish a supervisory framework to detect potential risks related to financial markets early on by means of:

  • a European body to oversee the stability of the financial system as a whole;
  • a European financial supervision system.

Security must also be an integral part of future European regulations. To this end, the Commission plans for:

  • a legislative instrument which establishes regulatory and supervisory standards for hedge funds and private equity;
  • a White Paper on tools for early intervention to prevent a possible crisis;
  • a report on derivatives and other complex structured products to increase transparency and ensure financial stability;
  • legislation to increase the quality and quantity of prudential capital, to address liquidity risk and limit excessive leverage.

With the aim of rebuilding the confidence of European investors, consumers and small and medium sized enterprises in their economies, their access to credit and their rights as concerns financial products, the Commission willundertake action in the following areas:

  • increasing the efficiency of marketing safeguards for retail investment products;
  • strengthening protection for bank depositors, investors and insurance policy holders;
  • the introduction of measures on responsible lending and borrowing.

The remuneration of employees in the financial sector and its directors is also under consideration through a package of legislative proposals which aim at submitting them to prudential oversight.

Finally, a harmonised system of sanctions should be introduced in order to prevent market abuse.

Supporting the real economy

The Single Market should continue to be the motor of economic and social prosperity in the European Union (EU). To this end, Member States should increase their support for the real economy by implementing the following principles:

  • eliminating barriers to the free movement of goods and services;
  • implementing structural changes which meet climate and energy challenges through the promotion of a low carbon economy;
  • promoting the exchange of good practices and synergies in terms of European cooperation;
  • keeping the Single Market open to trade partners.

Supporting the population

The crisis has also had negative consequences on the labour market and has accentuated problems of unemployment and social exclusion. In order to combat these issues, the Commission invites Member States to initiate action in the following areas:

  • keeping people in employment;
  • reinforcing activation and providing income support;
  • investing in re-training and skills upgrading;
  • preventing over-indebtedness and maintaining access to financial services;
  • guaranteeing free movement of workers;
  • implementing support measures for unskilled workers;
  • combating school drop-out;
  • promoting flexicurity in terms of employment protection.

Context

Part of this Communication was proposed in preparation for the G20 summit in London (April 2009). The following proposals were made with the aim of mitigating the deficiencies of the global economy caused by the crisis:

  • strengthening the global financial architecture;
  • strengthening the financial framework.