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EBA Issues New Guidelines on Sound Remuneration Policies

The European Banking Authority (EBA) has issued new guidelines on sound remuneration policies for banks, which took effect from December 31st, 2021. The guidelines aim to promote effective risk management and prevent excessive risk-taking by setting out the principles for designing and implementing remuneration policies.

Key Requirements

  • A bank’s remuneration policy must be gender-neutral and ensure equal pay for equal work of equal value for all staff.
  • The policy must also be consistent with the bank’s environmental, social, and governance (ESG) objectives.
  • Variable elements of remuneration must be based on an assessment of performance over a multi-year period, with payments spread over a period that takes account of the business cycle.
  • Staff in control functions must be remunerated in accordance with the achievement of objectives linked to their functions that are independent of the performance of the business areas they control.

Consumer Protection

Banks in Ireland are subject to various consumer protection codes and regulations, including:

  • Consumer Protection Code (CPC)
  • Central Bank Mortgage Arrears Resolution Programme (CCMA)
  • Small and Medium-sized Enterprise (SME) Regulations

These regulations aim to protect consumers by setting out conduct of business parameters, providing information requirements, and ensuring that banks deal fairly with customers.

Future Changes

The legal and regulatory landscape is expected to evolve in response to:

  • Technological innovation
  • Increased focus on culture and individual accountability
  • Need for enhanced risk management frameworks

The Central Bank has issued a “Dear CEO Letter” emphasizing the importance of boards taking ownership of environmental, social, and governance risks and promoting cultural awareness within their organizations.

New Individual Accountability Framework

The Central Bank has recommended reforms to establish a new Individual Accountability Framework, which would:

  • Introduce new conduct standards
  • Establish a Senior Executive Accountability Regime (SEAR)
  • Enhance the existing Fitness and Probity Regime
  • Change the enforcement investigations and enquiries process

This framework aims to promote a culture of accountability within regulated firms and ensure that individuals are held accountable for their actions.

Conclusion

The new EBA guidelines on sound remuneration policies aim to promote effective risk management and prevent excessive risk-taking by setting out the principles for designing and implementing remuneration policies. The guidelines also introduce new requirements for staff in control functions and provide a framework for banks to ensure equal pay for equal work of equal value.

In addition, the Central Bank’s focus on cultural awareness, individual accountability, and technological innovation is expected to shape the future regulatory landscape. As the financial services industry continues to evolve, it is essential that banks prioritize consumer protection, risk management, and accountability to ensure a stable and sustainable financial system.