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CRD3 Briefing
CEBS Guidance on Remuneration Provisions in the
Capital Requirements Directive
Summary
 There are two issues at play in the various press reports covering the
CEBS guidance on the CRD3 remuneration provisions: (i) the current
interpretation of the upfront cash limit provisions and the tax
implications of retention conditions; and (ii) the exaggeration of
provisions that relate to state assisted banks and fixed/variable pay
ratios.
Upfront Cash and Retention Conditions
 The provisions in CRD3 imply a cap on the maximum proportion of a
bonus that can be paid in cash upfront.
 These provisions are open to interpretation and throughout the
negotiation and implementation of the Directive, we have supported
an interpretation that limits upfront cash to 40% of a total bonus. This
interpretation is consistent with the G20 agreed FSB Standards.
 The European Parliament has taken a different view and interpret the
provisions as imposing a 20% cap. This will go beyond the globally
agreed position and will have a significant impact on the European
financial services sector’s international competitiveness.
 In addition, the EP are looking to impose minimum retention
conditions
on
non-cash
components.
These
carry
critical
tax
implications that are internally inconsistent under both the EP’s and
our view on upfront cash.
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 With respect to the EP’s view, an employee will face a tax liability at
the point their remuneration is awarded. If an employee is awarded
40% of their bonus upfront, only half of which is paid in cash, their tax
liability will consume this entire cash position and any further NICS
charges will likely mean his total liabilities cannot be paid out of
current income.
 With respect to our interpretation, 60% on an employee’s bonus will
be deferred, 10% in cash and 50% in shares. At the point a deferred
tranche is released (vests) it will incur a tax liability. However, when a
tranche of deferred shares vests, they will be subject to further
retention criteria and cannot be sold to pay this liability.
 The Committee of European Banking Supervisors (CEBS) has been
tasked
with
providing
non-binding
guidance
on
the
proper
implementation of the provisions. Despite significant support from
other Member States for our position, CEBS have issued a consultation
document supporting the EP’s position.
 As such, despite the fact the EP’s interpretation threatens the sector’s
international competitiveness and in is inconsistent from a tax
perspective, the lack of support from CEBS means some may argue
that we are supporting a position that is less onerous on bank pay
than other European legislators.
State Assisted Banks and Fixed/Variable Pay Ratios
 In addition, various press reports have suggested the Directive and
the CEBS guidance will impose variable/fixed pay ratios on firms and
will block the payment of variable pay to Directors at banks that are in
receipt of state aid. These reports are inaccurate and exaggerate the
provisions of the Directive.
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 To be clear – on state assisted banks, the directive says variable
remuneration should only be paid to directors to the extent it is
justified and that the remuneration policy should reflect the banks’
priorities to rebuild capital and provide for the recovery of taxpayer
assistance. The CEBS guidance makes it clear that member states’
competent authorities have flexibility in imposing conditions on
director’s pay at these banks and does not require a moratorium on
their
bonuses.
For
obvious
reasons
this
would
impair
the
competitiveness of these banks and have a significant impact on the
recoverability of taxpayer support.
 In addition, the guidance says quite clearly “it may be necessary to pay
variable remuneration to new directors, who are hired to rescue the
institution. As it will be difficult to hire new adequate management
capacity for an institution, it may be justified to award or pay variable
remuneration to new directors”. (CEBS Guidance, p.28)
 On Fixed and variable pay ratios, the directive says “fixed and variable
components of total pay are appropriately balanced [...] Institutions
should set the appropriate ratios...” (Annex V, Section 11, point 23).
The CEBS guidance repeats this view that it is the responsibility of the
institution and not the regulator, to set this ratio.
Lines to Take
 The Committee of European Banking Supervisors (CEBS) has issued a
consultation document on non-binding guidelines implementing EU
legislation on remuneration and bonuses.
 The consultation will run for one month before CEBS gives a final view.
 The UK believes it is important that in Europe we implement our
remuneration policy in line with the principles already agreed globally
by the G20.
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 We need global action to tackle bonuses. The G20 principles have
international agreement, which is why we believe they provide most
effective basis for action.
 The UK has led the way in implementing G20 principles and doesn’t
believe that the EU should go further than what was agreed by the
G20.
Background
 Two provisions in the Directive combine to impose an upfront cash
limit on variable remuneration packages:
 The deferral condition states that at least 60% of a bonus must be
deferred over an appropriate period; and
 The Cash/Equity condition states that at least 50% of a bonus must be
paid in non-cash instruments and held over an appropriate retention
period.
 We interpret the cash/equity condition as applying to the whole
variable remuneration package. As such conditions can be satisfied by
deferring 50% non-cash and 10% cash, leaving 40% cash available
upfront.
 The EP interpret the cash/equity condition as applying equally to both
the deferred and non-deferred components. As such, of the 40% not
deferred, half must be paid in securities and retained, leaving only
20% of the total bonus available in cash upfront.
 In addition, the EP support minimum retention criteria on all non-cash
pay components. This is inconsistent from a tax perspective and will
result in unfunded tax liabilities no matter which interpretation on
upfront cash is taken.
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 The FSA have already issued a consultation document outlining their
proposal to implement these provisions on the basis of our
interpretation.
 Throughout the negotiation of the Directive we have indicated to the
FSA that we support the line they have taken in the development of
CEBS guidance and the view reflected in their consultation.
Worked Example of EP’s Position
20% upfront cash limit and retention conditions on all non-cash
components.
 An employee receives a £1m bonus. 60% is deferred and 40% is nondeferred.
 Of the 40% non-deferred, half (20%) is paid in cash and half in noncash securities that must be held over a minimum retention period.
 However, as a higher rate taxpayer, the employee will have to pay 50%
income tax on the entire non-deferred component in the year it is
awarded. This means the half paid in cash is automatically consumed
by the tax liability and the employee receives zero cash upfront. Any
further charges like NICS will be unfunded.
 This is a significant departure from the internationally agreed position
in the FSB Standards.
Worked Example of Our Position with Minimum Retentions
 The same employee receives the same £1m bonus. 60% is deferred
and 40% is paid upfront in cash.
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 On the deferred component, 50% (£500,000) is paid in shares and the
remaining £100,000 is cash.
 When the deferred component vests it incurs a 50% tax liability
(£300,000). However, only £100,00 is available in cash to satisfy this.
The vested shares are still subject to minimum retention conditions
and cannot be sold. As such this results in an unfunded tax liability.
Our Position without Minimum Retentions
 The only consistent option is as above without minimum retention
conditions.
 If an organisation has discretion over the appropriate minimum
retention criteria, they can structure their remuneration packages such
that they comply with our upfront cash cap, are consistent with
globally agreed standards and do not imply any unfunded tax
liabilities.
 This is the position we have supported throughout the directive
negotiations.
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