In an attempt to harmonize new bonus cap rules, the European Commission this week approved new standards for determining which employees qualify as “material risk takers” in banks and investment firms in the European Union.

So-called material risk takers are employees whose work has a material impact on an institution's risk profile. The Regulatory Technical Standards (RTS) adopted by the commission are designed to increase transparency of bankers' pay and risk profiles by clarifying who is subject to the bonus cap.  The standards are intended to augment the Capital Requirements Directive (CRD IV), which contains remuneration requirements that prevent bonuses from exceeding 100 percent of an employee's salary, or 200 percent with shareholder approval.

“Some banks are doing their utmost to circumvent remuneration rules. The adoption of these technical standards is an important step towards ensuring that the capital requirement rules on remuneration are applied consistently across the EU,” Internal Market and Services Commissioner Michel Barnier said in a statement. “These standards will provide clarity on who new EU rules on bonuses actually apply to, which is key to preventing circumvention. In addition, the European Banking Authority has a mandate to ensure consistent supervisory practices on remuneration rules among competent authorities. The Commission will remain vigilant to ensure that new rules are applied in full.”

The bonus caps have been widely unpopular, with several banks finding loopholes in the law. A June survey by Towers Watson & Co. showed half of global banks said they would raise salaries to offset the caps, according to Bloomberg. Last month U.K.-based HSBC announced that lucrative, so-called fixed pay allowances would be given to its staff, an attempt to avoid the bonus cap rules, reported by The Guardian.

The European Banking Authority developed the new standards, which spell out how to identify material risk takers based on qualitative and quantitative criteria. Qualitative criteria include whether the employee is a member of the firm's management body, a senior manager, or has the power to commit significantly to credit risk exposures. Quantitative criteria include if total remuneration exceeds €500,000 a year, an employee is in the top 0.3 percent of wage-earners in the firm, or the employee's total remuneration is equal to or more than the remuneration of senior management or other risk takers.

An employee is determined to have a material impact on an institution's risk profile if he or she meets any of the criteria included in the new standards. All EU institutions subject to CRD IV are subject to the new regulations.

Financial institutions can rebut the presumption that an employee is a material risk taker if they are classified as a risk taker only under the quantitative criteria in certain cases. Firms must notify the relevant authority for exclusions for employees earning a total of €500,000 or more. Firms must seek prior approval from the relevant authority for exclusions of employees earning a total of €750,000 or more, or any employee in the top 0.3 percent of the pay scale. The competent authority must inform the EBA prior to approving an exclusion for an employee with total remuneration of €1 million or more. The rules place the burden of proof to show the individual does not have any impact on the institution's risk profile “squarely on the institutions.”

The European Parliament and Council have up to three months to review the new rules. After the review period, the rules will be published in the Official Journal of the European Union and take effect 20 days after publication. The rules will be binding directly without the need for Member States to pass corresponding national legislation.

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