Proportionality in the field of Governance and Remuneration Jo SWYNGEDOUW Deputy Director, Prudential Policy and Financial Stability Chair EBA Subgroup on Governance and Remuneration London, 22 October 2013

Proportionality in the field of Governance and Remuneration 2 / 9 Topics ► Proportionality provisions in CRD IV ► Proportionality operates both ways ► Concept of "significant" institutions ► Triggers and effects of proportionality ► Where does proportionality end? ► Regulation AND supervision

Proportionality in the field of Governance and Remuneration 3 / 9 Proportionality provisions in CRD IV Governance ► General principle in art. 74: ● Institutions shall have robust governance arrangements, which include [...] ● The arrangements, processes and mechanisms referred to in paragraph 1 shall be comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and the institution's activities. The technical criteria established in Articles 76 to 95 shall be taken into account. ► This concept of proportionality is also mentioned in: ● Art about the number of directorships which may be held by a member of the management body; and ● Art about the notion of sufficient time committment of a member of the management body to perform his functions.

Proportionality in the field of Governance and Remuneration 4 / 9 Proportionality provisions in CRD IV Remuneration ► Recital (66) [...] The provisions of this Directive on remuneration should reflect differences between different types of institutions in a proportionate manner, taking into account their size, internal organisation and the nature, scope and complexity of their activities. In particular it would not be proportionate to require certain types of investment firms to comply with all of those principles. ► Art Competent authorities shall ensure that, when establishing and applying the total remuneration policies, [...] institutions comply with the following principles in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities: [...]

Proportionality in the field of Governance and Remuneration 5 / 9 Proportionality operates both ways ► The effect of the proportionality principle is that not all institutions have to give substance to the regulatory requirements in the same way and to the same extent. ► Some institutions will need to apply more sophisticated policies or practices in fulfilling the requirements; other institutions can meet the requirements in a simpler or less burdensome way.

Proportionality in the field of Governance and Remuneration 6 / 9 "Significant" institutions ► Specific (stricter) requirements are set for "institutions which are significant in terms of their size, internal organisation and the nature, scope and complexity of their activities": ● Art nomination committee; ● Art the number of directorships which may be held by a member of the management body; ● Art remuneration commitee; ● Art CRR - disclosure requirements on remuneration also at the level of the members of the management body. ► The application of these stricter requirements for "significant" institutions does not prevent the proportionality principle to operate both ways in any (other) case (cf. previous slide).

Proportionality in the field of Governance and Remuneration 7 / 9 Triggers and effects of proportionality GovernanceRemuneration LevelAt the level of the institution  At the level of the institution  At the level of staff TriggerNature, scale and complexity of the risks inherent in the business model and the institution's activities Institution:  Size  Internal organisation  Nature, scope and complexity of the activities Staff (additional elements):  Seniority  Size of their mandate  Ratio variable/fixed ... EffectLess/more sophisticated approach  Neutralization  Less/more sophisticated approach

Proportionality in the field of Governance and Remuneration 8 / 9 Where does proportionality end? ► Proportionality does not imply that all requirements can be set aside! E.g.: ● Governance: internal control framework, fit & proper requirements... ● Remuneration: remuneration policy, remuneration of staff engaged in control functions... See annex 2 EBA Guidelines of 10 Dec on Remuneration Policies and Practices ► No comply or explain ► Institutions should comply or take alternative (equivalent) measures ► Supervisors should review the ways institutions actually implement the proportionality principle, thereby taking into account the overall financial market characteristics and the achievement of regulatory objectives.

Proportionality in the field of Governance and Remuneration 9 / 9 Regulation AND supervision ► Proportionality does not only play at the level of the regulatory requirements but also at the level of the supervisory practice ► Need for more intense and effective supervision particularly as it relates to systemically important financial institutions (SIFIs), prioritised based on an assessment of the risks therein. ► Further information: FSB report of 2 November 2010 on Intensity and Effectiveness of SIFI Supervision and progress reports (27 Oct. 2011, 1 Nov. 2012) ► Examples in the field of governance: ● Regular engagement with directors and people in key roles, especially Board-level committee chairs or influential non-executive directors, can provide supervisors with a better understanding of the financial institution’s governance and of the people involved. ● More regular and focused review of succession planning (process and identified candidates). ► Cf. also concept of baseline supervision: minimum adequate level of supervisory attention for each institution according to that institution’s risk profile (through peer group cluster analysis)