(1)

Excessive risk-taking in the financial services industry and in particular in banks and investment firms has contributed to the failure of financial undertakings and to systemic problems in the Member States and globally. These problems have spread to the rest of the economy and led to high costs for society.

(2)

Whilst not the main cause of the financial crisis that unfolded in 2007 and 2008, there is a widespread consensus that inappropriate remuneration practices in the financial services industry also induced excessive risk-taking and thus contributed to significant losses of major financial undertakings.

(3)

Remuneration practices in a large part of the financial services industry have been running counter to effective and sound risk management. These practices tended to reward short-term profit and gave staff incentives to pursue unduly risky activities which provided higher income in the short term while exposing financial undertakings to higher potential losses in the longer term.

(4)

In principle, if risk management and control systems were strong and highly effective, the risk-taking incentives provided by remuneration practices would be consistent with the risk tolerance of a financial undertaking. However, all risk management and control systems have limitations and, as the financial crisis has shown, can fail to deal with the risks created by inappropriate incentives, due to the increasing complexity of the risks and the range of ways by which risk may be taken. Consequently, a simple functional separation between business units and staff responsible for risk management and control systems is necessary but no longer sufficient.

(5)

Creating appropriate incentives within the remuneration system itself should reduce the burden on risk management and increase the likelihood that these systems become effective. Therefore, there is a need to establish principles on sound remuneration policies.

(6)

Given the competitive pressures in the financial services industry and the fact that many financial undertakings operate cross-border, it is important to ensure that principles on sound remuneration policy are applied consistently throughout the Member States. However, it is acknowledged that to be more effective, principles on sound remuneration policy would need to be implemented globally and in a consistent manner.

(7)

In its Communication to the Spring European Council ‘Driving European Recovery’ (1), the Commission presented its plan to restore and maintain a stable and reliable financial system. In particular, the Communication announced that a new Recommendation on remuneration in the financial services sector would be presented in order to improve risk management in financial firms and align pay incentives with sustainable performance.

(8)

This Recommendation sets out general principles applicable to remuneration policy in the financial services sector and should apply to all financial undertakings operating in the financial services industry.

(9)

Those general principles may be of more relevance to certain categories of financial undertakings than others, in the light of existing regulations and common practices in the financial services industry. These principles should apply in parallel to any rule or regulation governing a specific financial sector. In particular, fees and commissions received by intermediaries and external service providers in case of outsourced activities should not be addressed, since the compensation practices relating to such fees and commissions are already partially covered by particular regimes, in particular Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (2) and Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation (3). Furthermore, this Recommendation is without prejudice to the rights, where applicable, of social partners in collective bargaining.

(10)

With respect to financial undertakings whose securities are admitted to trading on a regulated market within the meaning of Directive 2004/39/EC in one or more Member States, this Recommendation apply in addition to and together with Commission Recommendation 2004/913/EC of 14 December 2004 fostering an appropriate regime for the remuneration of directors of listed companies (4) and Commission Recommendation 2009/385/EC of 30 April 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (5).

(11)

The remuneration policy of a particular financial undertaking should also be linked to the size of the financial undertaking concerned, as well as the nature and the complexity of its activities.

(12)

A risk-focused remuneration policy, which is consistent with effective risk management and does not entail excessive risk exposure, should be adopted.

(13)

Remuneration policy should cover those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking. In order to avoid incentives for excessive risk-taking, special arrangements should be adopted with regard to the remuneration of these categories of staff.

(14)

Remuneration policy should aim at aligning the personal objectives of staff members with the long-term interests of the financial undertaking concerned. The assessment of the performance-based components of remuneration should be based on longer-term performance and take into account the outstanding risks associated with the performance. The assessment of performance should be set in a multi-year framework, for example of three to five years, in order to ensure that the assessment process is based on longer term performance and that the actual payment of performance-based components of remuneration is spread over the business cycle of the company.

(15)

Financial undertakings should be able to reclaim variable components of remuneration that were awarded for performance based on data which has subsequently proven to be manifestly misstated.

(16)

As a general principle, payments related to early termination of a contract which are awarded on a contractual basis should not be a reward for failure. For directors of listed financial undertakings, specific provisions on termination payments set out in Recommendation 2009/385/EC should apply.

(17)

In order for remuneration policy to be in line with the objectives, the business strategy, the values and the long-term interests of the financial institution, other factors, apart from financial performance, should be considered, such as compliance with systems and controls of the financial institution, as well as compliance with the standards governing the relationship with clients and investors.

(18)

Effective governance is a necessary condition for the remuneration policy to be sound. The decision-making process regarding the remuneration policy of a financial undertaking should be internally transparent and should be designed in such a way as to avoid conflicts of interest and ensure the independence of the persons involved.

(19)

The governing body of the financial undertaking should have the ultimate responsibility for establishing the remuneration policy for the whole financial undertaking and monitoring its implementation. In order to provide necessary expertise, control functions and, where appropriate, human resources departments and experts should be involved in the process. In particular, control functions should also be involved in the design and the review of the implementation of the remuneration policy, and should be adequately rewarded so as to attract skilled individuals and to ensure their independence from the business units they control. The statutory auditor, within the limits of current reporting duties, should report on material weaknesses in the review of the implementation of the remuneration policy to the (supervisory) board or to the audit committee.

(20)

Control of the design and implementation of the remuneration policy is more likely to be effective if the stakeholders of the financial undertaking, including, where applicable, employee representatives, are properly informed of and engaged in the process of setting up and monitoring remuneration policy. For that purpose, financial undertakings should disclose the relevant information to their stakeholders.

(21)

The implementation of the principles laid down in this Recommendation should be reinforced through supervisory review at the national level. Therefore, supervisor’s overall assessment of the soundness of the financial undertaking should include the assessment of compliance of the remuneration policy of the financial undertaking with the principles laid down in this Recommendation.

(22)

Member States should ensure that branches of financial undertakings having their registered office or their head office in a third country and which operate in the territory of a Member State should be subject to similar principles on remuneration policy which apply to financial undertakings having their registered office or their head office in the territory of a Member State.

(23)

This Recommendation should apply without prejudice to measures which might be adopted by Member States with respect to remuneration policies of financial undertakings which benefit from State assistance.

(24)

The notification of measures by Member States in accordance with this Recommendation should include a clear timeframe for financial undertakings to adopt remuneration policies consistent with the principles set out in this Recommendation,