EUROPE - A new version of the EU's Capital Requirements Directive, due to be voted on this month, will place limitations on banks in relation to their remuneration packages, and could make them less risky as investments for pension funds.
The amended directive applies risk criteria to bonsues, whereby, if payouts represent more than 25% of total surplus revenue, shareholders would have the right to vote on the split of that surplus between capital remuneration and dividends.
The draft legislation includes penalties on sanctions in the case of a breach of these requirements and banks' remuneration policies.
The proposed rules could render banks safer investments for pension funds, although they could also potentially reduce the rate of return financial institutions produce.
One pension fund commented that banks have been "very risky" havens in the past and that the proposed measures from Brussels were running "more in less in parallel" with those from the Basel Committee on Banking Supervision.
Support for improvements to risk management of the remuneration in important financial institutions has come from the Association of British Insurers (ABI). The association stated that poor remuneration practices may have contributed to the current financial crisis situation.
It placed blame on the Basel II Directive, which "created perverse incentives for banks to take on leverage, which the banks naturally reacted to and rewarded staff for." The ABI added: "The regulatory framework must be reformed in this respect."
The new draft Capital Requirements Directive (CRD III) will come up for a Committee vote in the European Parliament on June 14.
Rapporteur for the draft Arlene McCarthy has described a need for "radical action to put in place long term rules to ensure a responsible and fair banking system, to restore consumer confidence and to tackle once and for a all the issue of bankers' bonuses and remuneration practices".
If the Committee vote gains support - as is expected - a confirmation will follow in plenary, expected in July, which would give "an indicative entry into force in EU jurisdictions" in early 2011.