Response to consultation Paper on Draft RTS on classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used the purposes of variable remuneration
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Question 1 – Are the provisions within Article 1 -15 sufficiently clear?
7.4. We note that point (e) of paragraph 2 of Article 1 states that instruments shall be priced at their value at the time the instrument is awarded, and the valuation shall be subject to in-dependent review. FIA EPTA members consider that it would be important to clarify if this regular independent review needs to be performed every year, as part of an annual vari-able remuneration being awarded. FIA EPTA members do not support such an approach as a regular independent valuation would constitute a disproportionate cost-burden to smaller investment firms. It should be noted that investment firms with total assets of EUR 100 million or less are still of relatively small size and it is important to consider the large reduction of the threshold amount, when compared to the current prudential re-gime and to what is being applied to credit institutions.
7.5. FIA EPTA members would ask the EBA to create a threshold of total assets at a higher level for the application of the condition in Article 1(2)(e).
7.6. In addition, FIA EPTA members would like to make the point that the requirements re-ferred to in point (a) of paragraph 2 of Article 4 of the proposed delegated regulation would be unduly costly and burdensome for unlisted firms with total assets above EUR 100 million. Specifically:
a. A credit rating for the underlying firms issuing the instruments and a requirement for them to be independently assessed;
b. Triggering event provisions (paragraph 2 of Article 4; and
c. Periodic independent review required under point (e) of paragraph 2 of Article 1.
7.7. FIA EPTA members would ask the EBA to create a threshold of total assets at a higher level for the application of these conditions, so that the conditions apply in a proportionate ate manner.
7.8. FIA EPTA also notes that a significant number of investment firms currently do not have and do not need, other than for the purposes of this regulation, a credit rating. We there-fore also query the cost benefit analysis of such requirements.
Question 2 – Is it appropriate to continue to require the same conditions for the use of AT1, Tier 2 and Other Instruments as under the current legislative framework?
7.9. We note that Article 52 and 63 of CRR indicate that one of the conditions that need to be met for instruments to be regarded as good capital from a Tier 1 or Tier 2 perspective is redemption of no earlier than 5 years. Allowing small investment firms a 3-year deferral of variable remuneration, for instruments held, would breach such a condition unless the de-ferral is extended to 5 years. FIA EPTA members would ask the EBA to consider avoiding such a mismatch so that a 3-year redemption is applied.
Question 3 – Are the provisions in Article 6 appropriate and sufficiently clear?
7.10. We note that Article 6(g)(i) states that where the alternative arrangement allows for pre-determined changes of the value received as variable remuneration during deferral and retention periods, based on the performance of the investment firm or the managed as-sets, one of the conditions that has to be met is that the change of the value is based on predefined performance indicators that are based on the credit quality of the institution or the performance of the managed assets.
7.11. FIA EPTA members are of the view that, as also noted with regard to other articles of the RTS, requiring a linkage to the credit quality of the investment firm itself would be a prob-lematic criteria for changes in the value of alternative instruments. Requiring this link also fails to take into consideration the fact that some investment firms may use group alterna-tive instruments that meet all of the other criteria of Article 6, but are not directly tied to the credit quality of the EU regulated investment firm. FIA EPTA members would ask the EBA to consider deleting the condition in Article 6(g)(i).
Implementation period
7.1. FIA EPTA members note that the ‘EBA next steps’ section (page 5) of the consultation pa-per, states that it is assumed that institutions will have to comply with the RTS with regard to the remuneration awarded for the performance year 2021.
7.2. There is an implied assumption that the application of the RTS on remuneration applies mid-way through a performance year for firms that have a calendar year end. We would strongly caution the EBA that such an asymmetrical approach can be expected to cause a significant administrative burden for a number of firms that will have to pro-rate variable remuneration awards to take into account different remuneration rules.
7.3. To mitigate for such an undue administrative burden, we would suggest that it would be better to provide an option for firms to apply this from the start of the accounting peri-od/year-end, following the date of adoption of IFR/IFD.
Question 1: Are the provisions within Article 1-5 sufficiently clear?
We refer to Section 7 of our attached consolidated response.Question 1 – Are the provisions within Article 1 -15 sufficiently clear?
7.4. We note that point (e) of paragraph 2 of Article 1 states that instruments shall be priced at their value at the time the instrument is awarded, and the valuation shall be subject to in-dependent review. FIA EPTA members consider that it would be important to clarify if this regular independent review needs to be performed every year, as part of an annual vari-able remuneration being awarded. FIA EPTA members do not support such an approach as a regular independent valuation would constitute a disproportionate cost-burden to smaller investment firms. It should be noted that investment firms with total assets of EUR 100 million or less are still of relatively small size and it is important to consider the large reduction of the threshold amount, when compared to the current prudential re-gime and to what is being applied to credit institutions.
7.5. FIA EPTA members would ask the EBA to create a threshold of total assets at a higher level for the application of the condition in Article 1(2)(e).
7.6. In addition, FIA EPTA members would like to make the point that the requirements re-ferred to in point (a) of paragraph 2 of Article 4 of the proposed delegated regulation would be unduly costly and burdensome for unlisted firms with total assets above EUR 100 million. Specifically:
a. A credit rating for the underlying firms issuing the instruments and a requirement for them to be independently assessed;
b. Triggering event provisions (paragraph 2 of Article 4; and
c. Periodic independent review required under point (e) of paragraph 2 of Article 1.
7.7. FIA EPTA members would ask the EBA to create a threshold of total assets at a higher level for the application of these conditions, so that the conditions apply in a proportionate ate manner.
7.8. FIA EPTA also notes that a significant number of investment firms currently do not have and do not need, other than for the purposes of this regulation, a credit rating. We there-fore also query the cost benefit analysis of such requirements.
Question 2: Is it appropriate to continue to require the same conditions for the use of AT1, Tier 2 and Other Instruments as under the current legislative framework?
We refer to Section 7 of our attached consolidated response.Question 2 – Is it appropriate to continue to require the same conditions for the use of AT1, Tier 2 and Other Instruments as under the current legislative framework?
7.9. We note that Article 52 and 63 of CRR indicate that one of the conditions that need to be met for instruments to be regarded as good capital from a Tier 1 or Tier 2 perspective is redemption of no earlier than 5 years. Allowing small investment firms a 3-year deferral of variable remuneration, for instruments held, would breach such a condition unless the de-ferral is extended to 5 years. FIA EPTA members would ask the EBA to consider avoiding such a mismatch so that a 3-year redemption is applied.
Question 3: Are the provisions in Article 6 appropriate and sufficiently clear? Where respondents are of the view that the draft RTS should define a set of specific arrangements rather than providing conditions that such arrangements should meet, comments are most helpful, when they clearly describe the alternative arrangements that investment firms desire to use to ensure that variable remuneration is aligned with the long-term interest of the investment firm and its risk profile.
We refer to Section 7 of our attached consolidated responseQuestion 3 – Are the provisions in Article 6 appropriate and sufficiently clear?
7.10. We note that Article 6(g)(i) states that where the alternative arrangement allows for pre-determined changes of the value received as variable remuneration during deferral and retention periods, based on the performance of the investment firm or the managed as-sets, one of the conditions that has to be met is that the change of the value is based on predefined performance indicators that are based on the credit quality of the institution or the performance of the managed assets.
7.11. FIA EPTA members are of the view that, as also noted with regard to other articles of the RTS, requiring a linkage to the credit quality of the investment firm itself would be a prob-lematic criteria for changes in the value of alternative instruments. Requiring this link also fails to take into consideration the fact that some investment firms may use group alterna-tive instruments that meet all of the other criteria of Article 6, but are not directly tied to the credit quality of the EU regulated investment firm. FIA EPTA members would ask the EBA to consider deleting the condition in Article 6(g)(i).
Question 4: Do respondents agree with the findings of the impact assessment? Where respondents have identified additional costs or burdens created by the draft RTS, it would be most helpful if respondents could specify and, where possible, quantify separately the costs for the implementation of the provision and the costs for the ongoing application of the provisions.
We refer to Section 7 of our attached consolidated response.Implementation period
7.1. FIA EPTA members note that the ‘EBA next steps’ section (page 5) of the consultation pa-per, states that it is assumed that institutions will have to comply with the RTS with regard to the remuneration awarded for the performance year 2021.
7.2. There is an implied assumption that the application of the RTS on remuneration applies mid-way through a performance year for firms that have a calendar year end. We would strongly caution the EBA that such an asymmetrical approach can be expected to cause a significant administrative burden for a number of firms that will have to pro-rate variable remuneration awards to take into account different remuneration rules.
7.3. To mitigate for such an undue administrative burden, we would suggest that it would be better to provide an option for firms to apply this from the start of the accounting peri-od/year-end, following the date of adoption of IFR/IFD.
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