TWN Info Service on Finance and Development (July11/02)
11 July 2011
Third World Network
 
BCBS issues disclosure requirements for remuneration
Published in SUNS #7183 dated 5 July 2011
 
Geneva, 4 Jul (Kanaga Raja) -- The Basel Committee on Banking Supervision (BCBS) has issued its final Pillar 3 disclosure requirements for remuneration, aimed at supporting effective market discipline by allowing market participants to assess the quality of a bank's compensation practices and the incentives towards risk-taking that they support.
 
According to a BCBS press release, the Committee's Pillar 3 disclosure requirements add greater detail to the guidance on this topic that was included in the supplemental Pillar 2 guidance issued by the Committee in July 2009.
 
[The Basel-II guidelines have three pillars. The first relates to the minimum capital requirements. The second addresses supervisory review and regulatory responses to the first pillar requirements. The third pillar is aimed at supplementing regulations through market disciplines by requiring lenders to publicly provide details of their risk management activities, risk rating processes, and risk distribution. As in respect of the other BCBS requirements, those now issued for Pillar 3 have to be adopted and implemented by national authorities through appropriate national rules and regulations. - SUNS]
 
The proposals under Pillar 3, says BCBS, cover the main components of sound remuneration practices and take full account of the Financial Stability Board's Principles for Sound Compensation Practices and their related Implementation Standards.
 
According to the BCBS document which was released on 1 July 2011, in July 2009, as part of its Enhancements to the Basel II framework, the Basel Committee on Banking Supervision introduced supplemental Pillar 2 guidance to address a number of risk management weaknesses revealed during the financial crisis that began in 2007.
 
In this context, the Committee notably incorporated within Pillar 2 the Financial Stability Board's Principles for Sound Compensation Practices, which were issued in April 2009 to improve compensation practices and strengthen supervision in this area.
 
In its Peer Review Report on Compensation (March 2010), the Financial Stability Board (FSB) noted differences in the existing disclosure requirements on compensation across jurisdictions and noted that these differences could hamper the comparability of the disclosed facts and, as a consequence, the effectiveness of disclosure as a whole.
 
Accordingly, to promote greater convergence of disclosure on compensation, the FSB made the following recommendation: Recommendation 8: "The Basel Committee in consultation with the FSB should consider incorporating disclosure requirements for compensation into Pillar 3 of Basel II, to add greater specificity to the current requirements for compensation disclosure under Pillar 2, by the end of 2010."
 
The Pillar 3 disclosure requirements proposed by the Basel Committee respond to this recommendation, said BCBS.
 
"The Committee believes that these additional Pillar 3 requirements on remuneration will support effective market discipline and will allow market participants to assess the quality of the compensation practices and the quality of support for a firm's strategy and risk posture."
 
The requirements have been designed to be sufficiently granular and detailed to allow meaningful assessments by market participants of a bank's compensation practices, while not requiring disclosure of sensitive or confidential information, it adds.
 
According to the BCBS document, the Committee's additional Pillar 3 disclosure requirements on remuneration cover the main components of sound compensation practices, consistent with paragraphs 86 to 92 of the Supplemental Pillar 2 Guidance issued in July 2009 and the corresponding FSB principles.
 
As a result, banks will be requested to disclose qualitative and quantitative information about their remuneration practices and policies covering the following areas:
 
-- The governance/committee structures (paragraph 86);
 
-- The design/operation of remuneration structure, frequency of review (paragraph 87);
 
-- The independence of remuneration for risk/compliance staff (paragraph 88);
 
-- The risk adjustment methodologies (paragraph 89);
 
-- The link between remuneration and performance (paragraph 90);
 
-- The long-term performance measures (deferral, malus, clawback - paragraph 91);
 
-- The types of remuneration (cash/equity, fixed/variable - paragraph 92).
 
According to the document, the disclosure requirements for remuneration should be incorporated into the Pillar 3 disclosure of banks. Unless specifically noted, the general principles and rules governing Pillar 3 apply.
 
The Basel Committee expects banks to comply with these requirements from 1 January 2012.
 
As to the scope of application, the document says that it is recognised that there is a broad spectrum of banks that are subject to Basel II and that the proposed disclosures may not be relevant for all such banks or for all their business lines.
 
In certain jurisdictions, banks subject to Basel II may not be of sufficient size to have a separate Remuneration Committee, or may not have resources to implement a fully functional deferral and performance adjustment scheme.
 
Pillar 3 remuneration disclosure requirements therefore may include thresholds of materiality or proportionality, based on those already applying to existing Pillar 3 disclosures, says BCBS.
 
This may have two aspects: whether the bank as a whole is exempt fully or partly from disclosure, depending on the risk profile of the bank; and whether certain types of disclosure may be exempted on grounds that the information is not material, or is proprietary or confidential.
 
As to the method and frequency of disclosure, BCBS says that banks will be expected to publish the disclosures on an annual basis at a minimum. Banks should aim to publish as soon as practicable after the information is available.
 
Banks will be expected as far as possible to disclose the requested information on remuneration on one site or in one document. Banks may however refer to a different site or document:
 
-- if an equivalent disclosure has already been made under an accounting or listing requirement relating to the same time period (in such cases, the bank's regulator will have discretion to recognise the existing disclosures that are acceptable);
 
-- or to indicate where additional information (not explicitly required under Pillar 3) may be found.
 
In such cases, the bank must ensure that access to the site or document is readily available and public.
 
According to the document, to improve clarity of disclosure, supervisors may request the information to be disclosed:
 
-- in table and/or chart format.
 
-- for previous years as well as the current reporting year (where providing quantitative historical baselines aids interpretation, supervisors should request that quantitative information for previous years be shown, although this requirement may be waived during the first year and banks may be permitted to report historical data only as far back as the first year of application of these requirements).
 
The document goes on to outline the main disclosures on remuneration (both qualitative and quantitative) that banks should include in their Pillar 3 document.
 
It states that banks are strongly encouraged not only to disclose the required information, but to articulate as far as possible how these factors complement and support their overall risk management framework.
 
The requested quantitative disclosures (detailed in the document) should only cover senior management and other material risk takers and be broken down between these two categories, it concludes. +