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July 2019
Tapestry
Alert: Financial Services
EIOPA
Consultation on Solvency II Remuneration Guidance
Dear
Client
The EU
Insurance and Occupational Pensions Authority (EIOPA), the
European Supervisory Authority responsible for the
regulation of the EU insurance sector, has published a consultation paper on its draft opinion
(Opinion) on the supervision of remuneration in the
insurance and reinsurance sector. The consultation ends on 30 September 2019.
Background
The
remuneration rules that apply to insurance and reinsurance firms
are found in the Solvency II Delegated Regulation (EU) 2015/35
(Solvency II). Solvency II establishes a range of remuneration
requirements that are typically less detailed, and are subject to
less detailed guidance, than the remuneration rules impacting other
types of financial services firms. The impact of this is that
Solvency II firms and supervisory authorities have 'considerable
discretion' as to how the remuneration requirements are applied.
EIOPA has
identified that this discretion has led to divergent practices
across Europe. The Opinion aims to enhance convergence in the
supervision of the remuneration policies of EU insurance and
reinsurance firms. The Opinion is targeted at supervisory
authorities and gives guidance to them on how to challenge the
application of the remuneration requirements by firms. EIOPA
has, however, stated that it is not their intention to add
requirements or to create administrative burden.
Scope
The Opinion
applies to remuneration for staff in the categories listed below,
whose annual variable remuneration exceeds EUR 50,000 and
represents more than 1/4 of their total annual remuneration:
- members of the administrative, management
and .
- supervisory body;
- other executives who effectively run the
firm;
- key governance holders as defined in
EIOPA's Guidelines on the system of governance; and
- categories of staff whose professional
activities have a material impact on the firm's risk
profile.
EIOPA has, however, stated that
for staff not covered by the Opinion, supervisory authorities
may adopt a proportionate and more flexible approach, including
applying the Opinion to staff outside of the scope identified above
but in a more flexible manner.
Key points
- Balance between
fixed and variable remuneration: the proportions of
fixed and variable remuneration must be such that
employees do not become overly dependent on variable
components and, if a firm exceeds the 1:1 ratio, the
supervisory authority should investigate whether the
remuneration policy is properly balanced. Supervisory
authorities should also pay specific attention to very low
fixed remuneration.
- Deferral of
variable remuneration: firms should
use different deferral periods depending upon the risks
entered into, as opposed to only applying the 3 year minimum.
Supervisory authorities should use their judgement to consider
whether a deferral rate higher than 40% and/or a longer
deferral period is needed. When deferral is lower than
40% supervisory authorities should engage with the firm
to understand the specific situation. The deferral rate
is recommended to be higher than 40% in the case of a
particularly high variable remuneration e.g. a ratio higher
than 1:1.
- Financial and
non-financial criteria: supervisory
authorities should ensure that firms, when assessing an
individual's performance ex ante, set out financial
(quantitative) and non-financial (qualitative)
criteria and describe the consequences on the
pay-out of variable remuneration when the criteria are not met
by the individual. The criteria used should be linked to
decisions made by the individual and should ensure the
remuneration award process has an appropriate impact on the
individual's behaviour. When assessing performance in
a multi-year framework, the following should be taken into
account: (a) financial criteria covering a period
long enough to capture the risk taken by staff; and (b)
non-financial criteria contributing to creation of
value for the firm, e.g. compliance, client service,
achievement of strategic goals, staff turnover
and reputation. The financial and non-financial criteria
should be appropriately balanced and supervisory
authorities should challenge where appropriate.
- Downward
adjustments: variable remuneration should not only be
adjusted downward when staff do not meet
their personal objectives, but also when their business
units and/or the firm as a whole fail to do so. If a
firm is likely to breach. or has breached, the
Solvency Capital Requirement its remuneration policy
should prescribe that downwards adjustment will be
applied. Supervisory authorities should require a clear
description of the downwards adjustment(s) from firms,
including at least: (a) how short to long-term
risks, cost of capital, internal capital requirements and
dividends policies have been taken into
account; (b) examples of how the downwards
adjustment works; (c) rationale for the chosen
downwards adjustment and triggers used; and (d) clarification
that the downwards adjustments are designed in a way that any
unvested portion of variable remuneration may be subject
to malus.
- Termination
payments: remuneration policies should specify the
possible use of termination payments, including maximum
payment or criteria for determining the amount. The Opinion
identifies payments that should qualify as termination
payments. When defining the maximum level of any termination
payment, the fixed/variable remuneration ratio should be taken
into account. Deferral requirements will apply to
termination payments, with some exceptions as outlined in the
Opinion. There is also guidance to help firms ensure that
termination payments reflect performance achieved over time
and are not being made to reward failure or being made in
other circumstances where such payments should not be
made. Supervisory authorities must ensure firms are able to
demonstrate the reasons for the payments, the appropriateness
of the amount and criteria, and that the payment is linked to
performance achieved over time and does not reward failure.
- Variable
remuneration composition: supervisory
authorities should ensure firms award 50% of variable
remuneration in shares, equivalent ownership or
share-linked instruments. The instruments should be subject to
an appropriate retention policy.
- Reporting: supervisory authorities
should collect qualitative and quantitative data to
enable them to perform a supervisory review of the
remuneration principles in accordance with the Opinion.
Tapestry
comment
This
Opinion follows the UK PRA's recent comments on the application of Solvency II,
in which the PRA identified disparities in how the Solvency
II remuneration requirements have been implemented. It is
notable that a few of the areas of disparity identified by the PRA,
such as in relation to downward adjustments and the
calculation of performance, are also addressed in the Opinion. This
shows that the disparity identified by the PRA for UK firms may
also be present throughout the EU generally.
As the
Opinion is addressed at supervisory authorities, as opposed to
firms directly, it is clear that EIOPA expects supervisory
authorities to take action to deal with the divergent supervisory
framework, in line with the new guidance, before taking a more
direct intervention. If supervisory authorities do not effectively
deal with the areas of disparity before EIOPA starts to
monitor the application of the Opinion two years after
publication, we may see more direct intervention. Any such
intervention is unlikely to happen soon and, in the interim, supervisory
authorities have time to try and bring firms into line with the
expectations outlined in the Opinion.
As the
Opinion is only in a draft format, firms should review their
existing policies and practices with the draft guidance in mind and
consider: (a) whether to engage in the consultation process;
and (b) whether, if the Opinion was to come into effect as drafted,
the firm's remuneration policy would be compliant with the
expectations outlined in the Opinion and, if not, either identify
any required remedial action or be prepared to explain and justify
any area of divergence.
If you
have any questions about this update or in relation to your
remuneration regulation compliance generally, please do contact us.
Matthew
and Sally
 
Matthew Hunter Sally Blanchflower
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