EBA consults on identifying material risk takers in investment firms

The European Banking Authority is consulting on the criteria for identifying material risk takers in investment firms as part of its implementation workplan on the Investment Firms Directive and Investment Firms Regulation (IFD/IFR). 

Interested parties have until 4 September 2020 to submit their responses. 

EBA/CP/2020/09 sets out the draft Regulatory Technical Standards on criteria to identify categories of staff whose professional activities have a material impact on an investment firm's risk profile or assets it manages under Directive (IFD) 2019/2034 of the European Parliament and of the Council on the prudential supervision of investment firms (the Draft RTS). 

IFD mandated the European Banking Authority (EBA), in consultation with the European Securities Markets Authority (ESMA), to develop draft regulatory technical standards (RTS) to specify appropriate criteria to identify the categories of staff whose professional activities have a material impact on the risk profile of the investment firm (So called MRTs or identified staff). In addition, the European Supervisory Authorities aim to minimize divergence from existing remuneration provisions in the financial services sector.

The proposals

The Draft RTS forms part of the governance and remuneration mandate of the EBA and aims to ensure that the variable remuneration of identified staff in Class 2 investment firms is aligned with the institution's risk profile in the long-term. It also seeks to ensure a harmonized identification of MRTs by setting out clear qualitative and appropriate quantitative criteria. There is a suggestion that further criteria may be applied based on the specific investment firm's risk profile. 

The qualitative criteria to be applied should identify staff in key areas and functions whose impact on the risk profile will always be considered as material, members of the management body for example and the manager of a business unit that contributes to more than a certain percentage of the investment firm's total own funds requirement at the end of the preceding financial year. There is also provision for considering staff in decision-making or managerial roles who may impact the risk profile of the firm. The qualitative criteria include membership of management in a managerial or supervisory role, membership of senior management and/or a staff member with managerial responsibilities for the activities of a control function or the prevention of money laundering and terrorist financing.  

The quantitative criteria for assessing whether certain staff impact the risk profile of the firm is based on remuneration received by staff members on the basis that it is reasonable to presume that remuneration is linked to a staff member's contribution to the investment firm's business objectives. This is linked to the impact of that staff member's professional activities on the risk profile of the investment firm or assets under management. However, such criterion should be based on both absolute and relative terms in relation to other staff in the investment firm. 

In contrast, although remuneration is a factor for senior members of staff, the RTS provides that the remuneration paid to staff in control functions, support functions or members of management in supervisory roles should not be taken into account. This should allow investment firms to demonstrate that, although a staff member falls within the remuneration bracket, they do not meet any of the other criteria and therefore do not have a material impact on the investment firm's risk profile or asset it manages. 

If a staff member meets one or more of the qualitative or quantitative criteria set out in the RTS, they shall be deemed to have a material impact on the investment firm's risk profile or assets it manages. 

National competent authorities are required under the RTS to ensure that investment firms maintain a record of any assessments made and of the staff whose professional activities have been identified as having (or not having) a material impact on the risk profile of the investment firm or the assets it manages. 

The consultation paper invites responses on the clarity and appropriateness of the RTS. In relation to the designation of managers of material business units as MRTs, responses are invited on whether a business unit should be classed as material if it contributes more than 10% or 20% of the investment firm's total own funds requirement at the end of the preceding financial year. The EBA has been collecting data on this point in order to identify the impact of its proposals and a number of Irish investment firms have been approached to submit data.

Next steps

Although a lot will be familiar there are some differences arising from these RTS. Investment Firms will be conscious of the need to assess the application of these RTS to their own operations and to make any submissions to the consultation paper based on their assessment.

For further information contact Dario Dagostino, Kevin Allen and Patrick Brandt, Financial Regulation Partners and Keavy Ryan, Partner and manager of our Incentives Group or Sinéad Prunty, Financial Regulation Knowledge Lawyer.

Date published: 3 September 2020