April 2018 · English Only
The Bank of Italy recently opened a public consultation on the proposed amendments to Regulation No. 285/2013 (“Regulation 285”) on remuneration policies in the banking sector, mainly with a view to aligning to the EBA Guidelines of December 20151 and complying with Articles 74(3) and 75(2) of Directive 2013/36/EU (so-called CRD IV).
The amendments to Regulation 285, once confirmed2, will apply to both banks and investment firms (società di intermediazione mobiliare), in line with the Joint Regulation issued by Bank of Italy and Consob.
While waiting for the conclusion of the consultation process and the (likely) confirmation of the proposed amendments, here below is a summary of the main expected changes.
• an updated definition of the different categories of banks, which now includes cooperative banking groups in line with Article 37-bis of the Italian Banking Act;
• a more precise definition of remuneration, with the introduction of criteria for a correct distinction between fixed and variable remuneration;
• strengthened provisions aimed at avoiding the use of vehicles, instruments or methods allowing circumvention of the rules on sound remuneration (including through introduction of information obligations on risk takers and internal investigations);
• the introduction of a more ed and documented annual procedure for the identification (and exclusion) of risk takers, to be reflected in the remuneration policy;
• a clearer specification of the role and competences of the: (i) shareholders’ meeting, (ii) strategic supervision bodies and remuneration committees, and (iii) risk management, compliance and auditing functions;
• more specific rules and criteria on the (i) exceptional increase of the: 1:1 fixed/variable ratio, (ii) deferred payment of the variable remuneration, and (iii) retention period of financial instruments;
• a definition of what level of variable remuneration constitutes a particularly high amount;
• new requirements on retention bonuses (including indication of the reasons for paying them and predefinition of the retention period required to receive the award);
• a more ed discipline for long term incentive plans (including in terms of duration, deferred payment, inclusion in the fixed/variable remuneration ratio);
• additional criteria for the payment of variable remuneration by banks which received State aids.
Additional and more ed provisions are introduced also in the sensitive area of golden parachutes.
First of all, banks are required to identify the minimum performance requirements which must be met in order for a risk taker to receive a golden parachute. In addition, the criteria and limits (in terms of number of annual salaries) for the determination of golden parachutes must be approved by the shareholders’ meeting.
As a general rule, golden parachutes:
(a) remain subject to the limitations applicable to variable remuneration, including in terms of deferral and partial pay out in instruments; and
(b) are now to be included in the fixed/variable ratio.
The new provisions clarify that golden parachutes also include (i) the consideration paid for a post-employment non-compete covenant, but only for the portion which exceeds the last annual fixed remuneration3 and (ii) the amounts paid to settle an actual or potential dispute.
As a partial exception to the above general rules, the following payments are excluded from the fixed/variable ratio (but still subject to deferral and partial pay out in instruments):
(a) the consideration paid for a post-employment non-compete covenant which does not exceed, for each year of validity of the covenant, the last annual fixed remuneration4; and
(b) the amounts paid within the frame of a settlement agreement, if calculated on the basis of a pre-defined formula to be reflected in the remuneration policy.
The approach adopted by the Bank of Italy in this area seems to somehow depart from the EBA Guidelines of December 2015. Indeed, according to paragraph 154 of the Guidelines severance payments (including golden parachutes) should not be taken into account for the purpose of the calculation of the fixed/variable ratio and also for the application of deferral and the pay out in instruments, among others, when:
(a) they are “mandatory under national labour law, mandatory following a decision of a court or calculated through a predefined generic formula set within the remuneration policy in the cases referred to in paragraph 149” (which include the circumstance where “the institution and a staff member agree on a settlement in case of a potential or actual labour dispute, to avoid a decision on a settlement by the courts”); and
(b) in the cases referred to in paragraph 149 (which include the settlement context referred above) where “the institution has demonstrated to the competent authority the reasons and appropriateness of the amount of the severance payment”.
1 Then published in Italian in June 2016.
2 Remarks, comments and counterproposals can be submitted to the Bank of Italy until May 14, 2018.
3 This means, conversely, that the consideration for a non-compete covenant which, irrespective of the duration of the covenant, does not exceed the last annual salary is not a golden parachute, and as such should be excluded from both the fixed/variable ratio and the deferral and partial pay out in instruments conditions.
4 Therefore, if the consideration for a 2-year covenant is Euro 200,000, and the risk taker earned Euro 100,000 in the last year of employment, the consideration is fully excluded from the fixed/variable ratio (while Euro 100,000, i.e. the portion in excess of the last annual salary, remain subject to deferral and partial payout in instruments). If instead the consideration should amount to Euro 240,000, Euro 40,000 are to be included in the fixed/variable ratio, while Euro 140,000 are subject to deferral and partial payout in instruments.
The only purpose of this Newsletter is to provide general information. It is not a legal opinion nor should it be relied upon as a substitute for legal advice.