Has the regulator implemented rules in relation to remuneration paid by banks to its staff?
By mid-May 2015, the rules in relation to remuneration paid by banks to their staff set out in the Capital Requirements Directive IV (CRD IV) had not been transposed into Polish law. However, the legislative process that will implement CRD IV through changes to the Banking Law of August 29, 1997 (Banking Law) is in progress. As at mid-May 2015, the draft amendment to the Banking Law (Draft Amendment) is being reviewed by the Council of Ministers and, following their final approval, it will be submitted to the Parliament. Therefore, the information set out in this briefing may change due to modifications to the Draft Amendment. The Draft Amendment is expected to be adopted by the Parliament during the second half of 2015. Along with adopting the Draft Amendment, the Minister of Finance will issue a regulation (Regulation) comprising implementing provisions, including those relating to the detailed scope of the remuneration policy and the manner in which it will be established. However, due to Poland’s Parliamentary elections scheduled for autumn 2015, the adoption of the Draft Amendment and the Regulation may be delayed.
Notwithstanding the above, the Capital Requirements Regulation (CRR), which came into force on January 1, 2014, is a directly applicable act in EU Member States (including Poland). As regards remuneration policy, the CRR provides a general framework for disclosure obligations.
The principles of the banks’ remuneration policy established under the Capital Requirements Directive III (CRD III) were implemented into Polish law by Resolution No. 258/2011 of the Polish Financial Supervision Authority (PFSA) on October 4, 2011 (PFSA Resolution), which is still in force. However, the binding nature of PFSA’s resolutions raises many concerns.
What categories of staff are caught by the regulator’s rules?
In accordance with article 28 of the PFSA Resolution, the remuneration requirements apply to those persons holding managerial positions at a bank. They include:
- management board members,
- persons directly reporting to a management board member, regardless of the basis of their employment,
- directors of branches and their deputies,
- chief accountant,
- persons responsible for control functions at the bank (managers of: internal audit unit, organisational unit for compliance and risk management at the bank and organisational units responsible for risk management and HR),
- each person whose actions may have a significant impact on the bank’s assets and liabilities and who has direct impact on the execution of agreements and amendments to the agreements as well as the terms and conditions thereof,
- each person whose total remuneration is at a level similar to the remuneration of the persons listed in items a-f.
Persons listed in items b) – g) are only considered as holding managerial positions at a bank if their actions may have a significant impact on the bank’s risk profile.
The proposed changes to the Banking Law foresee the application of remuneration policy for individual categories of personnel whose professional activities significantly affects the bank’s risk profile. More detailed definitions of such persons will be set out in the implementing provisions to the Draft Amendment, to be issued together with the Draft Amendment. They have not yet been made available to the public.
What are the key regulatory rules?
Under the PFSA Resolution, the bank’s management board is responsible for developing, introducing and updating the policy on variable components of remuneration, which must subsequently be approved by the supervisory board. When implemented, the policy on variable components of remuneration will:
- support sound and effective risk management by discouraging risk taking that is in excess of the bank’s risk appetite as approved by the supervisory board,
- support the execution of the bank’s strategy and limit conflicts of interests.
Banks which are classified as Significant Banks (as defined below) in terms of, for example, size or internal organisation, must have a remuneration committee comprising of supervisory board members or an audit committee members. Members of the remuneration committee are appointed by the supervisory board, or an audit committee. The remuneration committee provides advice with respect to the Significant Bank’s (as defined below) policy on variable components of remuneration whilst bearing in mind sound and prudent risk management, capital and liquidity requirements, and, especially, the long-term interests of the bank itself, its shareholders and investors. In accordance with the PFSA Resolution, Significant Banks are those that meet at least one of the following conditions
- shares of such bank have been admitted to trading on a regulated market;
- such bank’s share in the assets of the banking sector in Poland is at least 1%;
- such bank’s share of the deposits in the banking sector in Poland is at least 1%;
- such bank’s share of own funds in the banking sector in Poland is at least 1%.
In addition, the PFSA may classify a bank which does not meet any of the conditions listed above as Significant Bank when there are qualitative premises supporting such classification, for example the level of complexity of the bank’s organisational structure, IT systems or operations.
Apart from the above, the bank’s internal audit unit must review the implementation of the variable remuneration policy, and present a report to the supervisory board at least once a year.
The Draft Amendment does not introduce any changes to the above procedure for establishing a variable remuneration policy. This means that the remuneration policy will continue to be determined by the bank’s management board and, once approved, be implemented by the supervisory board.
The remuneration committee’s powers will be enhanced to cover not only advising on variable remuneration, but also providing opinions on the bank’s entire remuneration policy and risk management strategy. However, the extended powers of remuneration committees (as well as their composition and mode of operation) will be provided for in the Regulation, which is not yet publicly available.
The most important change in this area, already reflected in the Draft Amendment, is that the threshold for classifying a bank to be significant in terms of size, internal organisation, type, scope or complexity of activity, will be changed from 1% to 2%.
Are bonuses subject to the regulator’s rules?
Yes. The PFSA Resolution as well as the Draft Amendment cover bonuses, which are defined as variable components of remuneration depending on the assessment of a person’s performance. Remuneration also includes fixed components which account for the part of total remuneration that is big enough to enable application of a flexible policy with regard to variable components, including reduction of their amount or not paying them at all.
The following are some of the key rules related to bonuses, as set out in the PFSA Resolution currently in force:
- in order to minimize the short term effect of risk-driven decisions, the variable components are granted on the basis of a three year period, so as to take into account the bank’s economic cycle and risk related to the bank’s business;
- variable remuneration is granted or paid when it correlates with the bank’s financial standing domestically and is justified in terms of the bank’s results domestically and the results the organisational unit in which a given person was employed as well as the work results of the given person;
- at least 50% of the variable remuneration constitutes an incentive to particular care about bank’s long-term interest;
- at least 40% of the variable remuneration is paid after the evaluation period for which such remuneration is due;
- variable remuneration should be settled and paid in a transparent way;
- managers of an internal audit unit, a compliance risk management unit as well as organisational units responsible for risk management and HR are compensated, as regards variable remuneration, for achieving goals that arise from the functions they hold, and their remuneration may not be dependent on economic results generated by the areas they are in charge of at the bank;
- variable remuneration of persons holding managerial positions at the bank related to risk management and compliance of the bank’s operations with provisions of law and internal regulations needs to be advised on and monitored by the remuneration committee or, if such a committee has not been appointed, by the bank’s supervisory board.
The Draft Amendment does not specifically regulate bonuses. It is expected that such regulation will be introduced by the provisions implementing the Draft Amendment.
The most important change in this area, introduced by the Draft Amendment, is the delegation of powers to determine the requirements relating to the remuneration policy. These requirements, including as to the detailed scope of banks’ remuneration policies, will be set out in the Regulation.
What is the position concerning role based allowances?
Neither the PFSA Resolution, nor the Banking Law or the Draft Amendment, directly addresses role based allowances. However, it is anticipated that, similar to the EU member states that have already implemented CRD IV, the Polish legislator will follow the outline provided in the EBA report.
Do the regulator’s rules on remuneration have extraterritorial effect?
Yes. The PFSA Resolution requires banks to monitor risks (including variable components of remuneration) associated with the activities of their subsidiaries.
Furthermore, the Draft Amendment provides that the remuneration policy applied by a bank also applies to its subsidiaries and must take into account the remuneration policy of such bank’s parent company.
In addition to the above, as mentioned in the answer to question 6 above, the PFSA may, by means of a decision, require a parent company of a bank to publish, annually, information about the group management strategy, including remuneration policy, such information to be published in a manner generally accessible to the public (in particular, on the webpage maintained by such parent company), either in full form or by providing references to equivalent information.
The Draft Amendment refers to the definition of parent companies and subsidiaries included in the CRR. This means that the requirements relating to the remuneration policy are applicable on a consolidated basis, i.e. to the group, parent company and subsidiaries (including branches and subsidiaries incorporated in third countries).
Do you anticipate further reform in this area?
As noted in the answer to question 1, the legislative process concerning the Draft Amendment implementing CRD IV is still in progress; therefore, further amendments to Polish law as regards banks’ remuneration policies are expected.
It should also be emphasized that certain new regulations will be issued by the Minister of Finance, specifying inter alia the scope of banks’ remuneration policies, in order to clarify the rules laid down in the Draft Amendment. Related PFSA’s resolutions are also expected.
Must an institution’s remuneration policy be disclosed to the regulator?
The PFSA Resolution and the Draft Amendment provide that banks must furnish data on the number of employees whose total remuneration in the previous year exceeds the equivalent of EUR 1,000,000, along with information on their positions, the value of the main remuneration components, bonuses awarded, long-term awards and retirement contributions withheld, to the PFSA by January 31 of each year.
The euro equivalent of remuneration paid in currency other than euro is calculated based on the average FX rate of the National Bank of Poland prevailing on the date of payment.
The Draft Amendment sets out further disclosure requirements:
- banks are required to display, in a manner generally accessible to the public, a description of their management system, including their remuneration policy and information about the appointment of a remuneration committee; the banks must publish such information on their websites;
- the PFSA may, in instances, require a bank to increase the frequency of disclosures and to use specific media and venues for publishing the information referred to in the CRR, as well as set the dates on which the bank will be required to publish information;
- the PFSA may, by means of a decision, require the parent company of a bank to publish, annually, information about the group management strategy, including the remuneration policy, such information to be published in a manner generally accessible to the public (in particular, on the webpage maintained by such parent company), either in full form or by providing references to equivalent information.