Remuneration policies are a critical aspect of financial institutions’ strategies and operations, impacting both their stability and compliance with regulatory frameworks. This article aims to elucidate the principles governing remuneration policies under the purview of the Capital Requirements Directive (CRD), Capital Requirements Regulation (CRR), the European Banking Authority (EBA), and the European Securities and Markets Authority (ESMA), while also referencing pertinent circulars issued by the Cyprus Securities and Exchange Commission (CySEC).
Alignment with Financial Stability and Risk Management
Impact on Capital Adequacy
Remuneration policies designed in line with the CRD/CRR seek to align employee incentives with the long-term performance and financial stability of institutions. By doing so, these policies help mitigate the potential for excessive risk-taking that could affect capital adequacy – a fundamental element of CRD/CRR.
Encouraging Prudent Decision-Making
Variable compensation tied to risk-adjusted performance encourages employees to integrate risk management into their decision-making, harmonizing their goals with the institution’s stability and regulatory compliance.
Regulatory Compliance and Supervision
Meeting CRD/CRR Mandates
Institutions are mandated by the CRD/CRR to establish remuneration policies that not only incentivize prudent risk-taking but also comply with regulatory requirements. These policies must be demonstrably effective in promoting long-term stability and sound risk management.
Monitoring by Regulatory Authorities
Regulatory bodies, including CySEC, closely scrutinize the remuneration policies of financial institutions to ensure adherence to the CRD/CRR guidelines. Non-compliance can result in sanctions, fines, or operational restrictions, impacting the institutions’ capital management.
Fixed and Variable Pay Components
Essential Elements of Compensation
Employees conventionally receive a mix of fixed (base salary) and variable (performance-based bonuses, commissions) pay. Fixed pay guarantees a stable income, while variable pay offers performance incentives. A purely variable pay structure is unusual and generally not in line with regulatory expectations for stability.
CySEC and EBA Guidelines on Remuneration Practices
Benchmarking and Gender Pay Gap (Circular C576)
CySEC, under the EBA guidelines, requires Cyprus Investment Firms (CIF) to submit detailed reports on their remuneration practices and the gender pay gap. CIFs must provide annual disclosures of general remuneration information (Annexes I-IV) and a triennial report on gender pay disparity (Annex V).
High Earner Data Collection (Circular C576)
CIF entities must also disclose information on high earners, defined as staff with a remuneration exceeding EUR 1 million, by submitting Annexes I and II. This reporting ensures transparency and enables benchmarking exercises to assess remuneration trends.
Reporting Obligations Summary
Timelines and Requirements
The data submission to CySEC is clearly outlined in terms of reference years and deadlines. Entities must adhere to these timelines to remain compliant, with the XBRL Portal being a key tool for submission, updated June 2023.
CySEC Circulars on Remuneration
CySEC Circular 138 is a regulatory notice issued by the Cyprus Securities and Exchange Commission which addresses the remuneration policies and practices of Cyprus Investment Firms (CIFs). This circular emphasizes the need for CIFs to establish and maintain remuneration structures that are in compliance with the Investment Services and Activities and Regulated Markets Law of 2007, especially focusing on mitigating conflicts of interest and ensuring adherence to the conduct of business rules. It outlines specific guidelines on how remunerations should be structured, advises on the involvement of compliance functions in the design and review process, and addresses the implications of outsourcing on remuneration policies. The circular also provides examples of remuneration practices that may lead to conflicts of interest and requires CIFs to review their policies accordingly, implement necessary corrective actions, and confirm compliance with the CySEC.
CySEC Circular 145 serves as a clarificatory document following Circular 138, intended to further elucidate the guidelines on remuneration policies and practices for CIFs. It reiterates the importance of identifying and managing potential conflicts of interest in remuneration and reinforces the responsibility of CIFs to take reasonable measures to prevent such conflicts unless they can demonstrate to CySEC that the risks can be objectively managed. The circular underlines the examples mentioned in Circular 138, clarifying that these are not exhaustive and that CIFs should apply due diligence to recognize other potential risks in their remuneration policies. Circular 145 essentially acts as an additional guidance document, supporting CIFs in ensuring their remuneration structures do not adversely affect their obligation to act in their clients’ best interests.
Aside from benchmarking exercises, this circular addresses marketing communications, aiming for transparent and equitable remuneration practices, including the consideration of the gender pay gap.
Circular C578 (ESMA35-43-3565)
Circular C578 issued by the Cyprus Securities and Exchange Commission (CySEC) on June 6, 2023, communicates to Regulated Entities the publication of the ESMA Guidelines on certain aspects of the MiFID II remuneration requirements. The circular outlines several key points:
- The Guidelines address the remuneration requirements detailed in Article 27 of the MiFID II Delegated Regulation, clarifying the connection to conflict of interest requirements and conduct of business rules within MiFID II regulations.
- From October 5, 2023, the Guidelines will be in effect, setting forth the standard for remuneration policies in financial institutions to comply with.
- The previous remuneration policies and practices outlined in MiFID, ESMA/2023/606, will no longer be applicable after the given date.
- CySEC has integrated the Guidelines into its regulatory framework and supervisory practices, and it stresses the importance for Regulated Entities to familiarize themselves and conform to these new standards.
The integration of remuneration policies with regulatory frameworks like CRD/CRR is imperative for maintaining the financial stability and integrity of institutions. CySEC, aligning with EBA and ESMA guidelines, plays a pivotal role in ensuring that these policies are transparent and fair, and promote a risk-aware culture within financial entities. Compliance with these guidelines, through timely reporting and adherence to the established remuneration structure, is not just a regulatory requirement but also a cornerstone of sound corporate governance.
At CX Financa, we specialize in tailoring compensation frameworks to meet the stringent expectations of financial regulators. Our team is dedicated to assisting financial institutions as they work through the intricacies of regulatory compliance. We invite you to engage with our expertise in crafting remuneration strategies that are not only compliant with the latest regulatory standards but also integrate corporate social responsibility (CSR) principles.
“Ensure your organization’s ethical growth by partnering with CX Financia’s compliance team. Our expertise reinforces resilience and accountability in your financial operations. For more information or assistance with implementing our guidelines, feel free to reach out to us. We’re here to help you navigate the path to financial excellence.”