Payment of variable remuneration in non-SNI IFR investment firms: findings of non-compliance during the EBA’s benchmarking exercise on remuneration practices for financial year 2022

In 2023, the CSSF collected data in the framework of the benchmarking exercise on remuneration practices led by the European Banking Authority (“EBA”) for the financial year 2022.

The sample used for the exercise notably included class 2 investment firms (non-SNI IFR IF, hereinafter the “entities”)¹, selected in compliance with the provisions of §13 of the EBA Guidelines on the benchmarking exercises on remuneration practices and the gender pay gap under Directive (EU) 2019/2034 (EBA/GL/2022/07).

When examining the reports submitted by the concerned entities, the CSSF noticed the existence of violations of their legal obligations regarding the awarding and payment of any variable remuneration to individuals identified as material risk takers² (hereinafter “MRT”), detailed in (3) and (4) of Article 38-22 of the Law of 5 April 1993 on the financial sector, as amended (hereinafter the “LSF”).

The purpose of this communiqué is therefore to shed light on these situations of non-compliance in order to remind the entities of their legal obligations when it comes to awarding and paying variable remuneration, as well as to inform the market about the measures undertaken by the CSSF as a response to these violations.

In compliance with Article 38-22(3) of the LSF:

• In entities where the value of their on and off-balance sheet assets is on average higher than EUR 100,000,000 over the four-year period immediately preceding the relevant financial year, and
• For individuals, whose annual variable remuneration exceeds EUR 50,000 and represents more than one fourth of those individuals’ total annual remuneration,

any variable remuneration awarded and paid must meet the following requirements:

• At least 50% of the variable remuneration must be paid in financial instruments, and
• At least 40% of the variable remuneration must be deferred over a three to five‐year period.

In applying the proportionality principle, these rules may benefit from two levels of derogation, each having its own scope.

The entities may derogate from their legal obligations concerning the deferral and payment in financial instruments of the variable remuneration for each MRT whose annual variable remuneration is inferior to EUR 50,000 and does not constitute more than one fourth of their total annual remuneration.

This derogation is labelled as applying on an “individual” level as its criteria must be appraised for each relevant MRT. Hence, it cannot be applied to all MRT in a general manner.

The entities may derogate from the above-mentioned legal obligations on an institutional level, i.e. in a general manner for all their MRT (irrespective of the amount of their variable remuneration), provided that the value of their on and off-balance sheet assets is, on average, inferior to EUR 100,000,000 over the four-year period immediately preceding the relevant financial year.

It must be noted that according to Article 38-22(4) of the LSF, entities may be allowed, provided certain cumulative conditions are met, to increase the EUR 100,000,000 threshold to an amount of EUR 300,000,000.

The CSSF noted that some entities had applied derogations on the institutional level and therefore did not comply with their legal obligation to pay part of the variable remuneration in financial instruments and to defer the payment of a part thereof.

However, the value of their on and off-balance sheet assets was, on average, superior to EUR 100,000,000 over the four-year period between 2018 and 2021. Consequently, they were, in principle, not allowed to benefit from this derogation.

After thorough examination, it appeared that the concerned entities had spontaneously applied the increased EUR 300,000,000 threshold detailed in Article 38-22(4) of the LSF. However, they did not comply with the first condition to benefit from this increased threshold, i.e. not being, in Luxembourg, one of the three largest investment firms in terms of total assets. This omission resulted in the investment firms concerned being in breach of their legal obligations.

It should be noted that the information on the importance of entities in terms of total asset value is not made public. In case of doubt, before applying any derogation, each entity concerned is expected to question the CSSF (on an annual basis if necessary) about its position within the Luxembourg market.

The CSSF also noted that some entities had applied derogations on an individual level for certain MRT, whereas the latter had received in 2022 an annual variable remuneration exceeding EUR 50,000 (Art. 38-22(3) of the LSF).

Considering that these entities were also not allowed to apply a derogation on the institutional level, they equally found themselves in breach of their legal obligations concerning variable remuneration.

It is necessary that all entities ensure that the conditions foreseen under Article 38-22(3) and (4) of the LSF are met in order to avoid any situation of non-compliance when awarding and paying variable remuneration to their MRT.

In particular, this point may be carefully examined during the annual, central and independent evaluation of their remuneration policies (Article 38-20(1)(7) of the LSF). In addition, should any breach be detected, the CSSF must be informed without delay, and remedial measures must be taken immediately.

Considering that the violations detected by the CSSF could derive from serious governance issues, it intends to inform the financial sector that it will continue to monitor the proper application of the rules applicable to the awarding and payment of any variable remuneration within the entities. Failure to comply with these rules may result in strict measures, up to and including sanctions.