CSSF CIRCULAR 11/505 Remuneration Policies Applicable In The Financial Sector And The Proportionality Principle : Additional Guidance For Financial Institutions

Remuneration policy has been implemented at the European level explaining that one main factor of the financial crisis was the inappropriate remuneration structure of certain institutions of the financial sector. More precisely, it was generally recognized that "excessive remuneration in the financial sector fuelled a risk appetite that was disproportionate to the loss-absorption capacity of institutions and of the financial sector as a whole".1

In this framework, the Commission de Surveillance du Secteur Financier (hereafter the « CSSF ») issued on 11 March 2011 the Circular 11/505 relating to the implementation of remuneration policies within the financial sector and specifying the application of the proportionality principle (hereafter the "Circular 11/505") 2.

The purpose of this Circular 11/505 is to detail the rules laid down in CSSF circulars 10/496 3 and 10/4974 (hereafter the "Circulars CRD III") transposing Directive 2010/76/EU of the European Parliament and of the Counsel dated 24 November 2010 as regards capital requirements for trading books and re-securitizations, and the prudential supervision of remuneration policies (hereafter the "CRD III").

The Circular 11/505 mainly explains the application of the proportionality principle by credit institutions and investment firms when the latter implement their remuneration policies in accordance to CEBS Guidelines 5 on Remuneration Policies and Practices (hereafter the "CEBS Guidelines") published on 10 December 2010 (which are attached to the Circulars CRD III).

The Circular 11/505 also specifies the situations in which financial institutions, typically presenting a lower prudential risk profile, could avoid or neutralized certain remuneration policies according to the proportionality principle.

The scope of the remuneration policies The CEBS Guidelines and the Circular 11/505 aim to specify to which institutions and to which category of staff the remuneration policies shall apply.

The institutions concerned by the remuneration policies:

Pursuant to Circular 11/505, Circulars CRD III apply, under a solo basis, to credit institutions and investment firms incorporated under Luxembourg Law (except some investment firms which are not included in the scope of the CSSF Circular 10/497 6 and to their foreign branches. Circulars CRD III also apply to branches of non-European credit institutions and investments firms. Furthermore, mother companies which are supervised by the Luxembourg CSSF...