Response to discussion on the potential review of the investment firms’ prudential framework
Q1: What would be the operational constraints of potentially removing the threshold?
NA
Q2: Would you suggest any further element to be considered regarding the thresholds used for the categorisation of Class 3 investment firms?
NA
Q3: Do you have any views on the possible ways forward discussed above regarding the transition of investment firms between Class 2 and Class 3 should be introduced?
NA
Q4: Should the minimum level of the own funds requirements be different depending on the activities performed by investment firms or on firms’ business model? If yes, which elements should be considered in setting such minimum?
NA
Q5: Is it necessary to differentiate the deductibles by activity or by business model for the purpose of calculating the FOR? If yes, which items should then be considered and for what reasons?
NA
Q6: Are expenses related to tied agents material for the calculation of the FOR to the extent to require a dedicated treatment for their calculation? If yes, are the considerations provided above sufficient to cover all the relevant aspects?
NA
Q7: Should the FOR be calculated distinguishing the costs related to non-MiFID activities, which criteria should be considered? What kind of advantages or disadvantages would this have in practice?
NA
Q8: Should expenses related to fluctuation of exchange rates be included in the list of deductions for the calculation of the FOR? If yes, which criteria should be considered in addition to the ones suggested above?
NA
Q9: Should the concept of ‘ongoing advice’ be further specified for the purpose of calculating the K-AUM? If yes, which elements should be taken into account in distinguishing a recurring provision of investment advice from a one-off or non-recurring one?
NA
Q10: Does the K-DTF provide a proper level of capital requirements for the provision of the services Trading on own account and execution of order on behalf of clients on account of the investment firm? If not, what elements of the calculation of the K-DTF present most challenges?
NA
Q11: Would you have any examples where the calculation of the K-DTF based on comparable activities or portfolios results in very different or counterintuitive outcomes? If yes, how could the calculation of the K-DTF be improved?
NA
Q12: What are the elements of the current methodology for the calculation of the K-ASA that raise most concerns? Taking into account the need to avoid complexifying excessively the methodology, how could the calculation of the K-ASA be improved to assess those elements?
NA
Q13: Clients’ asset protection may be implemented differently in different Member States. Should this aspect be considered in the calculation of the K-ASA? If so, how should that be taken into account in the calculation?
NA
Q14: Should crypto-assets be included into K-factor calculation, either as a new K-factor or as part of K-NPR?
NA
Q15: In the context of addressing operational risk for investment firm trading on own account, is there any further element to be considered to ensure that the requirements are proportionate to their trading activities?
NA
Q16: The discussion paper envisages the possibility to rely on alternative methodologies with respect to the K-DTF. If the respondents suggest an alternative approach, how would this refer to the two activities addressed under the K-DTF (trading on own account and execution on own account on behalf of the clients)?
NA
Q17: When addressing other activities an investment firm may perform, which elements, on top of the discussed ones, should be also taken in consideration?
NA
Q18: Investment firms performing MiFID activities 3 and 6 (trading on own account and underwriting on a firm commitment basis) are more exposed to unexpected liquidity needs because of market volatility. What would be the best way to measure and include liquidity needs arising from these activities as a liquidity requirement?
NA
Q19: Investment firms performing the activities of providing loans and credit to clients as an ancillary service in a non-negligeable scale would be more exposed to liquidity risks. What would be the best way to measure such risk in order to take them into account for the purposes of the liquidity requirements?
NA
Q20: Investment firms, providing any of the MiFID services, but exposed to substantial exchange foreign exchange risk may be exposed to liquidity risks. What would be the best way to measure such risk in order to take them into account for the purposes of the liquidity requirements?
NA
Q21: Are there scenarios where the dependency on service providers, especially in third countries, if disrupted, may lead to unexpected liquidity needs? What type of services such providers perform?
NA
Q22: Are there scenarios where the dependency on liquidity providers, especially in third countries, would lead to unexpected liquidity needs? Could you provide some examples?
NA
Q23: What other elements should be considered in removing the possibility of the exemption in Article 43 of the IFR?
NA
Q24: Do you have any views on the possible ways forward discussed above concerning the provision of MiFID ancillary services by UCITS management companies and AIFMs?
Introductory remarks on Section 9
AFG is of the opinion that the existing framework dedicated to investment firms through IFD and IFR is fit to take into account their specificities, in a more proportionate manner than was the case under CRD and CRR. And the regulatory framework for UCITS management companies and AIFMs has proven its effectiveness and robustness during the last decades. We therefore believe that revising such established frameworks would not contribute to an efficient Capital Market Union.
Answer
Firstly, AFG would like to stress the fact that the review of the IFD/IFR prudential framework, as provided for in the review clauses of IFD and IFR[1], does not contain any mandate for EBA and ESMA to also review capital requirements for UCITS management companies and AIFMs. Section 9 of the Call for advice only contemplates interactions of both aforementioned regulations with other regulations, in particular AIFM and UCITS Directives. AFG therefore believes that the two possible ways forward suggested in the Call for advice, such as imposing capital requirements on UCITS and FIAs management companies or introducing requirements limiting the amount of provided ancillary services by such management companies, exceed EBA’s and ESMA’s mandate within the framework of this review.
Policymakers are currently conducting extensive work to identify ways to improve the Capital Markets Union, in a context where European capital markets struggle to develop and face strong competition from non-EU actors. One of the prerequisites for the development European investments markets is regulatory stability, especially for regulations such as UCITS and AIFMD that have proved efficient in achieving their purposes. Indeed, UCITS Directive and AIFMD have been reviewed very recently, the amending Directive 2024/927 having been published in the Official Journal in March 2024. As such, it is disproportionate to reopen every year such key regulations that have been functioning well, especially given that the question of the computation methodology for AUMs has been analysed within the AIFMD in 2021 and the European Commission has deemed the current methodology adequate.
To be noted that firms that manage greater AUMs are not subject to higher operational risks (e.g. negligence, violation of conduct rules or investment policies), but evidence is actually contrary, as firms that manage larger AUM typically have more stringent compliance and risk management frameworks. As a reminder, assets are managed on behalf of third parties and are segregated.
Even more so, we strongly oppose the suggested alternative of limiting the volume of ancillary services provided by UCITS/AIFMD management companies, that would create unwarranted organisational complexities such as: undue costs, notably related to the resulting obligation to create dedicated subsidiaries, impossibility to benefit from economies of scale.
[1] Article 66 of IFD n°2019/2034 and Article 66 of IFR n°2019/2033
Q25: Are differences in the regulatory regimes between MICAR and IFR/IFD a concern to market participants regarding a level playing field between CASPs and Investment firms providing crypto-asset related services? In particular, are there concerns on the capital and liquidity requirement regimes?
NA
Q26: Sections 5.2, 5.4 as well as this Section 9.1 all touch upon how crypto-assets (exposures and services) may influence the IFD and the IFR. Is there any other related element that should be considered in the review of the investment firms’ prudential framework?
NA
Q27: Is the different scope of application of remuneration requirements a concern for firms regarding the level playing field between different investment firms (class 1 minus and class 2), UCITS management companies and AIFMs, e.g., in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for the application of the requirements?
Introductory remarks on Section 10
Set out below, are the answers to the questions 27 to 30 of the Call For Advice, which have been prepared by AFG’s Technical Committee on Remunerations. AFG is the leading trade association for asset managers in France.
As the Call For Advice entails a review of the remuneration provisions set out in the Investment Firms Directive and Regulation (“IFD/IFR”) when compared to other sectoral remuneration provisions, including AIFMD/UCITS, AFG’s Technical Committee on Remunerations wishes to express the following observations and answers to those questions 27 to 30, corresponding to “Section 10 Remuneration and its Governance” of the Call For Advice (please see for ease of reference, the corresponding extract of the Call For Advice, quoted in Appendix to this memo).
First, AFG welcomes the factual approach of the Call for Advice, and regarding the variations between IFD/IFR’s and AIFMD/UCITS’ remuneration provisions in particular, notes the broad statement in §230, that “the supervisory community does not have any practical evidence causing problems due to this legal differences with regard to the application of remuneration requirements in these firms”.
Second, as an important element of context, AFG would like to stress that the remuneration framework which inspired both AIFMD/UCITS’ and IFD/IFR’s, as well as CRD’s and even MICAR’s, and Solvency II’s, etc. is the framework defined by the G20 in September 2009 in Pittsburgh, shortly after the Great Financial Crisis, aka the “Implementation Standards of the Principles For Sound Compensation Practices” (“PSCPs”), which were subsequently rolled-out worldwide, as monitored from time to time by the FSB. This consistency by design ensured both a quality and robust level playing field across the financial sectors in all G20 jurisdictions.
In the EU, CRD 3 was first to include PSCPs (end 2009), then AIFMD (2011), then UCITS and CRD 4 (2013), etc.
We believe it is important to note two points:
- The range of financial players is extensive. Remuneration is a very highly strategic dimension for each of these entities. As activities, functions and sizes are very diverse, a full one size fits all approach is not possible. For example, banks bear risks on their balance sheet and not encouraging excessive (and short-term) risk taking via wrong incentives is of the essence; while asset managers are entrusted with the management of their clients’ assets, which are not on asset managers’ books, and incentives must be primarily geared towards the level of risk taking which has been promised to such clients and the protection of their interest. For example, too conservative remuneration practices in asset management could incentivize so-called “closet-tracking” (or “career risk-adverse”) behaviors from portfolio managers, hence result in an unintended and client interests-adverse outcome. Therefore, it was recognized early by the EU co-legislators that although certain key principles should be universal (e.g. comprehensive inclusion of risks, qualitative and quantitative performance measurement, long term alignment, independence of control functions, robust governance, disclosure, etc.) certain practices such as notably: modalities of risk alignment, compensation structure, regulated staff, proportionality would be differentiated in financial sectors’ specific legislation.
- G20/FSB’s 2009 priority was to weed out systemic risk from the financial sector’s remuneration practices. Hence in PSCPs’ 5 pages, the word “risk” is mentioned 18 times, while the words “client” and “investor” are never mentioned. In the EU, a more comprehensive approach has been designed since the early 2010s: notably, mis-selling risk was specifically addressed by MIFID Remuneration Guidelines published in June 2013 (followed by a revision in 2023, notably to adapt to MIFID II). Also, in AIFMD/UCITS Remuneration Guidelines in particular, the avoidance of conflicts of interests in incentives were specifically flagged as a key remuneration policy objective. These Guidelines were published in 2013 (AIFMD) and updated (to cover also UCITS) in 2016.
It should be stressed that the PSCP model, which assigns a clear autonomy and responsibility for the remuneration policy to the management body in its supervisory role, and ensures high professional standards and long term alignment by strong controls (notably, annual audit), significant disclosure and (generally) three year deferral of variable remuneration for the most senior managers and risk takers, has proven effective, and remuneration scandals in the financial sector have become a rare occurrence today, whilst they were unfortunately rather frequent before 2010.
In conclusion, we believe the remuneration framework in the EU financial sector strikes an effective and well-structured balance between :
- consistency in principles, which ensures a robust level playing field across financial sectors, thanks to FSB’s seminal PSCPs, and
- necessary differentiation to taylor each financial sector’s specific risks and strategic dynamics.
Given the introductory remarks above highlighting the consistency of remuneration principles, we concur with the broad observation made at § 230, that consider that the differences in certain practical requirements are not preventing a level playing field nor creating unfair or disproportionate costs to certain sectors. To the contrary, we welcome the time-proven balance between consistency inspired by the simple and powerful PSCP framework, and the wisdom developed over time by EU legislators when differentiating the framework per sector where needed (notably: risk alignment modalities, compensation structure, regulated staff, proportionality…), after due and thorough public consultations of stakeholders and the industry.
Indeed, we note that in CRD, subsidiaries part of a banking group have the possibility to apply their sector specific provisions on remuneration. This is notably the case for investment firms covered by CRD, where Art. 109(4)(a) CRR allows subsidiaries to apply different remuneration policies if they are subject to sector-specific EU legislation (e.g. IFD/AIFMD/UCITSD). As pointed out in § 231 of the Call for Advice, this is not the case for the provisions of IFD and therefore we would suggest to adjust Art. 25 IFD so that subsidiaries part of an investment firm Group may apply as well their sectoral remuneration legislations.
Q28: Are the different provisions on remuneration policies, related to governance requirements and the different approach to identify the staff to whom they apply a concern for firms regarding the level playing field between different investment firms (class 1 minus under CRD or class 2 under IFD), UCITS management companies and AIFMs, e.g. in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for the application of the requirements?
Introductory remarks on Section 10
Set out below, are the answers to the questions 27 to 30 of the Call For Advice, which have been prepared by AFG’s Technical Committee on Remunerations. AFG is the leading trade association for asset managers in France.
As the Call For Advice entails a review of the remuneration provisions set out in the Investment Firms Directive and Regulation (“IFD/IFR”) when compared to other sectoral remuneration provisions, including AIFMD/UCITS, AFG’s Technical Committee on Remunerations wishes to express the following observations and answers to those questions 27 to 30, corresponding to “Section 10 Remuneration and its Governance” of the Call For Advice (please see for ease of reference, the corresponding extract of the Call For Advice, quoted in Appendix to this memo).
First, AFG welcomes the factual approach of the Call for Advice, and regarding the variations between IFD/IFR’s and AIFMD/UCITS’ remuneration provisions in particular, notes the broad statement in §230, that “the supervisory community does not have any practical evidence causing problems due to this legal differences with regard to the application of remuneration requirements in these firms”.
Second, as an important element of context, AFG would like to stress that the remuneration framework which inspired both AIFMD/UCITS’ and IFD/IFR’s, as well as CRD’s and even MICAR’s, and Solvency II’s, etc. is the framework defined by the G20 in September 2009 in Pittsburgh, shortly after the Great Financial Crisis, aka the “Implementation Standards of the Principles For Sound Compensation Practices” (“PSCPs”), which were subsequently rolled-out worldwide, as monitored from time to time by the FSB. This consistency by design ensured both a quality and robust level playing field across the financial sectors in all G20 jurisdictions.
In the EU, CRD 3 was first to include PSCPs (end 2009), then AIFMD (2011), then UCITS and CRD 4 (2013), etc.
We believe it is important to note two points:
- The range of financial players is extensive. Remuneration is a very highly strategic dimension for each of these entities. As activities, functions and sizes are very diverse, a full one size fits all approach is not possible. For example, banks bear risks on their balance sheet and not encouraging excessive (and short-term) risk taking via wrong incentives is of the essence; while asset managers are entrusted with the management of their clients’ assets, which are not on asset managers’ books, and incentives must be primarily geared towards the level of risk taking which has been promised to such clients and the protection of their interest. For example, too conservative remuneration practices in asset management could incentivize so-called “closet-tracking” (or “career risk-adverse”) behaviors from portfolio managers, hence result in an unintended and client interests-adverse outcome. Therefore, it was recognized early by the EU co-legislators that although certain key principles should be universal (e.g. comprehensive inclusion of risks, qualitative and quantitative performance measurement, long term alignment, independence of control functions, robust governance, disclosure, etc.) certain practices such as notably: modalities of risk alignment, compensation structure, regulated staff, proportionality would be differentiated in financial sectors’ specific legislation.
- G20/FSB’s 2009 priority was to weed out systemic risk from the financial sector’s remuneration practices. Hence in PSCPs’ 5 pages, the word “risk” is mentioned 18 times, while the words “client” and “investor” are never mentioned. In the EU, a more comprehensive approach has been designed since the early 2010s: notably, mis-selling risk was specifically addressed by MIFID Remuneration Guidelines published in June 2013 (followed by a revision in 2023, notably to adapt to MIFID II). Also, in AIFMD/UCITS Remuneration Guidelines in particular, the avoidance of conflicts of interests in incentives were specifically flagged as a key remuneration policy objective. These Guidelines were published in 2013 (AIFMD) and updated (to cover also UCITS) in 2016.
It should be stressed that the PSCP model, which assigns a clear autonomy and responsibility for the remuneration policy to the management body in its supervisory role, and ensures high professional standards and long term alignment by strong controls (notably, annual audit), significant disclosure and (generally) three year deferral of variable remuneration for the most senior managers and risk takers, has proven effective, and remuneration scandals in the financial sector have become a rare occurrence today, whilst they were unfortunately rather frequent before 2010.
In conclusion, we believe the remuneration framework in the EU financial sector strikes an effective and well-structured balance between :
- consistency in principles, which ensures a robust level playing field across financial sectors, thanks to FSB’s seminal PSCPs, and
- necessary differentiation to taylor each financial sector’s specific risks and strategic dynamics.
Given the introductory remarks above highlighting the consistency of remuneration principles, we concur with the broad observation made at § 230, that consider that the differences in certain practical requirements are not preventing a level playing field nor creating unfair or disproportionate costs to certain sectors. To the contrary, we welcome the time-proven balance between consistency inspired by the simple and powerful PSCP framework, and the wisdom developed over time by EU legislators when differentiating the framework per sector where needed (notably: risk alignment modalities, compensation structure, regulated staff, proportionality…), after due and thorough public consultations of stakeholders and the industry.
In addition, regarding § 234 and its considerations on gender neutrality (and also, §244), we note that the Pay Transparency Directive must be transposed EU-wide before June 2026, and thus that this issue will be dealt with comprehensively beyond the sole financial sector, thereby further strengthening a level playing field between financial sectors and also with other sectors of the economy. We believe it is important to avoid layering the regulations and would respectfully encourage the EU legislators to implement subsidiarity, ensuring the financial sector has no “gold plating” vs. the rest of the economy, in terms of equal pay, including in respect of gender difference.
Q29: Are the different provisions, criteria and thresholds regarding the application of derogations to the provisions on variable remuneration, and that they apply to all investment firms equally without consideration of their specific business model, a concern to firms regarding the level playing field between different investment firms (class 1 minus under CRD and class 2 under IFD), UCITS management companies and AIFMs, e.g., in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for applying the deferral and pay out in instruments requirements? Please provide a reasoning for your position and if possible, quantify the impact on costs and numbers of identified staff to whom remuneration provisions regarding deferral and pay out in instruments need to be applied.
Introductory remarks on Section 10
Set out below, are the answers to the questions 27 to 30 of the Call For Advice, which have been prepared by AFG’s Technical Committee on Remunerations. AFG is the leading trade association for asset managers in France.
As the Call For Advice entails a review of the remuneration provisions set out in the Investment Firms Directive and Regulation (“IFD/IFR”) when compared to other sectoral remuneration provisions, including AIFMD/UCITS, AFG’s Technical Committee on Remunerations wishes to express the following observations and answers to those questions 27 to 30, corresponding to “Section 10 Remuneration and its Governance” of the Call For Advice (please see for ease of reference, the corresponding extract of the Call For Advice, quoted in Appendix to this memo).
First, AFG welcomes the factual approach of the Call for Advice, and regarding the variations between IFD/IFR’s and AIFMD/UCITS’ remuneration provisions in particular, notes the broad statement in §230, that “the supervisory community does not have any practical evidence causing problems due to this legal differences with regard to the application of remuneration requirements in these firms”.
Second, as an important element of context, AFG would like to stress that the remuneration framework which inspired both AIFMD/UCITS’ and IFD/IFR’s, as well as CRD’s and even MICAR’s, and Solvency II’s, etc. is the framework defined by the G20 in September 2009 in Pittsburgh, shortly after the Great Financial Crisis, aka the “Implementation Standards of the Principles For Sound Compensation Practices” (“PSCPs”), which were subsequently rolled-out worldwide, as monitored from time to time by the FSB. This consistency by design ensured both a quality and robust level playing field across the financial sectors in all G20 jurisdictions.
In the EU, CRD 3 was first to include PSCPs (end 2009), then AIFMD (2011), then UCITS and CRD 4 (2013), etc.
We believe it is important to note two points:
- The range of financial players is extensive. Remuneration is a very highly strategic dimension for each of these entities. As activities, functions and sizes are very diverse, a full one size fits all approach is not possible. For example, banks bear risks on their balance sheet and not encouraging excessive (and short-term) risk taking via wrong incentives is of the essence; while asset managers are entrusted with the management of their clients’ assets, which are not on asset managers’ books, and incentives must be primarily geared towards the level of risk taking which has been promised to such clients and the protection of their interest. For example, too conservative remuneration practices in asset management could incentivize so-called “closet-tracking” (or “career risk-adverse”) behaviors from portfolio managers, hence result in an unintended and client interests-adverse outcome. Therefore, it was recognized early by the EU co-legislators that although certain key principles should be universal (e.g. comprehensive inclusion of risks, qualitative and quantitative performance measurement, long term alignment, independence of control functions, robust governance, disclosure, etc.) certain practices such as notably: modalities of risk alignment, compensation structure, regulated staff, proportionality would be differentiated in financial sectors’ specific legislation.
- G20/FSB’s 2009 priority was to weed out systemic risk from the financial sector’s remuneration practices. Hence in PSCPs’ 5 pages, the word “risk” is mentioned 18 times, while the words “client” and “investor” are never mentioned. In the EU, a more comprehensive approach has been designed since the early 2010s: notably, mis-selling risk was specifically addressed by MIFID Remuneration Guidelines published in June 2013 (followed by a revision in 2023, notably to adapt to MIFID II). Also, in AIFMD/UCITS Remuneration Guidelines in particular, the avoidance of conflicts of interests in incentives were specifically flagged as a key remuneration policy objective. These Guidelines were published in 2013 (AIFMD) and updated (to cover also UCITS) in 2016.
It should be stressed that the PSCP model, which assigns a clear autonomy and responsibility for the remuneration policy to the management body in its supervisory role, and ensures high professional standards and long term alignment by strong controls (notably, annual audit), significant disclosure and (generally) three year deferral of variable remuneration for the most senior managers and risk takers, has proven effective, and remuneration scandals in the financial sector have become a rare occurrence today, whilst they were unfortunately rather frequent before 2010.
In conclusion, we believe the remuneration framework in the EU financial sector strikes an effective and well-structured balance between :
- consistency in principles, which ensures a robust level playing field across financial sectors, thanks to FSB’s seminal PSCPs, and
- necessary differentiation to taylor each financial sector’s specific risks and strategic dynamics.
Given the introductory remarks above highlighting the consistency of remuneration principles, we concur with the broad observation made at § 230, that consider that the differences in certain practical requirements are not preventing a level playing field nor creating unfair or disproportionate costs to certain sectors. To the contrary, we welcome the time-proven balance between consistency inspired by the simple and powerful PSCP framework, and the wisdom developed over time by EU legislators when differentiating the framework per sector where needed (notably: risk alignment modalities, compensation structure, regulated staff, proportionality…), after due and thorough public consultations of stakeholders and the industry.
Regarding § 239 in particular, notably for the reasons mentioned in the introductory remarks above, we believe UCITS and AIFMD should not be “aligned” on the mentioned aspects with CRD and IFD. Also, we note that CRD contains provisions, notably in article 109 of CRR, which specifically provide for the banning of circumvention in the field of remuneration, which ensures regulatory robustness.
Q30: Are the different provisions regarding the oversight on remuneration policies, disclosure and transparency a concern for firms regarding the level playing field between different investment firm, UCITS management companies and AIFMs, e.g., with regard to the costs for the application of the requirements or the need to align these underlying provisions? Please provide a reasoning for your position.
Introductory remarks on Section 10
Set out below, are the answers to the questions 27 to 30 of the Call For Advice, which have been prepared by AFG’s Technical Committee on Remunerations. AFG is the leading trade association for asset managers in France.
As the Call For Advice entails a review of the remuneration provisions set out in the Investment Firms Directive and Regulation (“IFD/IFR”) when compared to other sectoral remuneration provisions, including AIFMD/UCITS, AFG’s Technical Committee on Remunerations wishes to express the following observations and answers to those questions 27 to 30, corresponding to “Section 10 Remuneration and its Governance” of the Call For Advice (please see for ease of reference, the corresponding extract of the Call For Advice, quoted in Appendix to this memo).
First, AFG welcomes the factual approach of the Call for Advice, and regarding the variations between IFD/IFR’s and AIFMD/UCITS’ remuneration provisions in particular, notes the broad statement in §230, that “the supervisory community does not have any practical evidence causing problems due to this legal differences with regard to the application of remuneration requirements in these firms”.
Second, as an important element of context, AFG would like to stress that the remuneration framework which inspired both AIFMD/UCITS’ and IFD/IFR’s, as well as CRD’s and even MICAR’s, and Solvency II’s, etc. is the framework defined by the G20 in September 2009 in Pittsburgh, shortly after the Great Financial Crisis, aka the “Implementation Standards of the Principles For Sound Compensation Practices” (“PSCPs”), which were subsequently rolled-out worldwide, as monitored from time to time by the FSB. This consistency by design ensured both a quality and robust level playing field across the financial sectors in all G20 jurisdictions.
In the EU, CRD 3 was first to include PSCPs (end 2009), then AIFMD (2011), then UCITS and CRD 4 (2013), etc.
We believe it is important to note two points:
- The range of financial players is extensive. Remuneration is a very highly strategic dimension for each of these entities. As activities, functions and sizes are very diverse, a full one size fits all approach is not possible. For example, banks bear risks on their balance sheet and not encouraging excessive (and short-term) risk taking via wrong incentives is of the essence; while asset managers are entrusted with the management of their clients’ assets, which are not on asset managers’ books, and incentives must be primarily geared towards the level of risk taking which has been promised to such clients and the protection of their interest. For example, too conservative remuneration practices in asset management could incentivize so-called “closet-tracking” (or “career risk-adverse”) behaviors from portfolio managers, hence result in an unintended and client interests-adverse outcome. Therefore, it was recognized early by the EU co-legislators that although certain key principles should be universal (e.g. comprehensive inclusion of risks, qualitative and quantitative performance measurement, long term alignment, independence of control functions, robust governance, disclosure, etc.) certain practices such as notably: modalities of risk alignment, compensation structure, regulated staff, proportionality would be differentiated in financial sectors’ specific legislation.
- G20/FSB’s 2009 priority was to weed out systemic risk from the financial sector’s remuneration practices. Hence in PSCPs’ 5 pages, the word “risk” is mentioned 18 times, while the words “client” and “investor” are never mentioned. In the EU, a more comprehensive approach has been designed since the early 2010s: notably, mis-selling risk was specifically addressed by MIFID Remuneration Guidelines published in June 2013 (followed by a revision in 2023, notably to adapt to MIFID II). Also, in AIFMD/UCITS Remuneration Guidelines in particular, the avoidance of conflicts of interests in incentives were specifically flagged as a key remuneration policy objective. These Guidelines were published in 2013 (AIFMD) and updated (to cover also UCITS) in 2016.
It should be stressed that the PSCP model, which assigns a clear autonomy and responsibility for the remuneration policy to the management body in its supervisory role, and ensures high professional standards and long term alignment by strong controls (notably, annual audit), significant disclosure and (generally) three year deferral of variable remuneration for the most senior managers and risk takers, has proven effective, and remuneration scandals in the financial sector have become a rare occurrence today, whilst they were unfortunately rather frequent before 2010.
In conclusion, we believe the remuneration framework in the EU financial sector strikes an effective and well-structured balance between :
- consistency in principles, which ensures a robust level playing field across financial sectors, thanks to FSB’s seminal PSCPs, and
- necessary differentiation to taylor each financial sector’s specific risks and strategic dynamics.
Given the introductory remarks above highlighting the consistency of remuneration principles, we concur with the broad observation made at § 230, that consider that the differences in certain practical requirements are not preventing a level playing field nor creating unfair or disproportionate costs to certain sectors. To the contrary, we welcome the time-proven balance between consistency inspired by the simple and powerful PSCP framework, and the wisdom developed over time by EU legislators when differentiating the framework per sector where needed (notably: risk alignment modalities, compensation structure, regulated staff, proportionality…), after due and thorough public consultations of stakeholders and the industry.
Regarding § 243 in particular, on the granularity of disclosure, it seems to us that the granularity may be too detailed in IFD and to a certain extent, in CRD, and if a greater convergence were to be achieved, we would respectfully suggest that a prior survey be implemented, to verify if the detailed disclosures of IFD (and CRD) are:
- useful to stakeholders to whom these disclosures are intended
- not weakening the competitiveness of EU financial institutions vs. non-EU players, who are subject to lighter requirements and better able to protect their competitive positions.
Q31: What would be costs or benefits of extending existing reporting requirement to financial information? Which other elements should be considered before introducing such requirement?
NA
Q32: Should there be the need to introduce prudential requirement for firms active in commodity markets and that are not currently subject to prudential requirements? How could the existing framework for investment firms be adapted for those cases? If a different prudential framework needs to be developed, what are the main elements that should be considered?
NA