A regulatory focus on gender pay – CRD then IFD…

On 22 November 2021, the European Banking Authority (EBA) published its final report and guidelines on sound remuneration policies for investment firms under the Investment Firms Directive (IFD) (the IFD Guidelines or the Guidelines) which require investment firms to have a gender-neutral remuneration policy. The Guidelines will apply to competent authorities across the EU, as well as to credit institutions and investment firms on an individual and consolidated basis.

The EBA IFD Guidelines are closely based on the equivalent EBA guidelines under CRD for credit institutions (CRD Guidelines). The IFD Guidelines will come into force on 30 April 2022; importantly, they state that the remuneration policy should be applied in line with these Guidelines for the performance year starting after 31 December 2021. In other words, in-scope firms need to be thinking about this change now (and CRD credit institutions should already have done so, as the CRD Guidelines came into force on 31 December 2021).

The EBA sound remuneration guidelines do not expressly cover the UK post-Brexit as they are addressed to competent authorities of EU member states. However, given the guidelines build on the CRD V Directive that the UK has implemented and the desire for the UK to maintain international standards in respect of the regulation of remuneration in the financial services sector, the PRA and FCA may have reference to the guidelines to some degree when they are looking at the new FCA Remuneration Code provisions on gender neutral pay.

Further, for credit institutions and investment firms with European operations, these EBA guidelines together with the proposed EU Pay Transparency Directive working its way through the European Parliamentary process, reflect the broader regulatory focus on diversity and inclusion and societal pressure to address the gender pay gap.

The principle that men and women should receive equal pay for equal work or work of equal value has been required under EU law since the Equal Pay Directive in 1975 (now the Equal Treatment Directive (Recast) (2006/54/EC), and Article 157 of the Treaty on Functioning of the European Union 2012), and in the UK since the Equal Pay Act 1970 (now the Equality Act 2010).

As you may remember, financial services firms are subject to a formal obligation to put in place gender-neutral remuneration policies under the Fifth Capital Requirements Directive (CRD V) and the IFD – so they should anyway comply with the principle of equal pay for equal work or work of equal value.

As mentioned above, the IFD Guidelines broadly follow CRD Guidelines, but reflect differences such as the absence of a bonus cap and differences in instruments and the length of deferral periods– see our insights on those CRD Guidelines.

Further, while the UK regulators have made it clear to Remco Chairs for years that they expect firms to ensure non-discriminatory pay arrangements, the UK regulators have implemented/are now implementing the CRDV/IFD gender neutral pay requirements in SYSC 19D for dual regulated firms, and SYSC 19G for non-SNI firms (which came into force on 1 January 2022).

CRD and IFD require firms to have a gender-neutral remuneration policy – what does this mean in practice?

Like the CRD guidelines, the Guidelines state that investment firms should have in place a gender-neutral remuneration policy for all staff.

• This means “staff, independent of their gender, should be equally remunerated for equal work or work of equal value” (para 12, Guidelines).
• All aspects of the remuneration policy must be gender-neutral (including the award and pay-out conditions for remuneration) in accordance with IFD remuneration requirements.
• The remuneration policy should specify all components of remuneration and include also the pension policy. The fixed remuneration of staff should be gender neutral in the same way as the variable remuneration (para 14, Guidelines).
• Fixed remuneration should reflect an individual’s professional experience and organisational responsibility taking into account the level of education, the degree of seniority, the level of expertise and skills, the constraints (e.g. social, economic, cultural or other relevant factors) and job experience, the relevant business activity and remuneration level of the geographical location.
• NB It is unclear how firms are expected to adjust an individual’s remuneration in light of the “constraints” that they may have faced to achieve a gender-neutral outcome. The report states “… the principle of equal treatment shall not prevent Member States from maintaining or adopting measures providing for specific advantages in order to make it easier for the underrepresented sex to pursue a vocational activity or to prevent or compensate for disadvantages in professional careers.” (p.8, para 20 Report). It is not clear to us exactly what is meant for this. But this should clearly be handled with care given the risks of unlawful positive discrimination.
• In addition to the principle of equal pay on recruitment, the report recognises the importance of equal opportunities throughout a career: “There should be a gender-neutral approach to pay increases and career progressions” (para 12, Guidelines). By way of context, the report states: “Equal career perspectives help to improve the representation of the underrepresented gender in management body of investment firms in the longer run by facilitating the existence of a diverse pool of candidates for such positions, eg within investment firms’ senior management.”(p9)
• The Guidelines also contain anti-discrimination and equal opportunities provisions which are important to foster diversity and to tackle the gender pay gap. For example, the Guidelines require the monitoring of the application of gender-neutral remuneration policies to avoid discrimination (para 26, Guidelines).

Requirement for remuneration policy to be consistent with risk management and ESG objectives; to implement, maintain and develop a risk-aligned remuneration culture and framework in the financial services sector

This article focuses on the requirement for the remuneration policy to be gender-neutral. But, both EBA guidelines on sound remuneration contain broader requirements for the remuneration policy to be consistent with and promote sound and effective risk management; and be consistent with the long-term strategy of the investment firm, including the overall business strategy, the corresponding risk strategy and appetite.

Further, the IFD Guidelines say that the investment firm’s remuneration policy for staff should “be consistent with the objectives of the investment firm’s business and risk strategy, including environmental, social and governance (ESG) risk-related objectives, corporate culture and values, risk culture, including with regard to environmental, social and governance risk factors, long-term interests of the investment firm, and the measures used to avoid conflicts of interest, encourage prudent risk taking and responsible business conduct” (para 16, Guidelines).

The proportionality principle applies - the level of sophistication of the remuneration policies and risk measurement approach will turn on the scale and complexity of the activities, and risk profile.

UK Remuneration Code provisions on gender neutral remuneration

Having noted the provisions of the EBA Guidelines from an EU perspective, we take the opportunity to review the UK regulatory requirements which apply. In the UK, SYSC19D (for dual regulated firms) and SYSC10G (for non-SNI investment firms) explicitly state that “A firm must ensure that its remuneration policy is a gender neutral remuneration policy and the practices referred to in SYSC [19D/G].2.1R are gender neutral.”

SYSC 19D/G go on to remind firms (by way of guidance) of the provisions of the Equality Act which prohibit discrimination on the basis of an individual’s protected characteristics. The language in the two Remuneration Codes is slightly different but notable that it refers generically to all the protected characteristics under the Equality Act and not just gender/sex. This language has not previously been included in the Remuneration Codes.

In looking at how this might affect the position in practice, it is also important to consider the recent FCA and PRA Discussion Paper on D&I (DP21/2 – see point 10 of our 2021 year in review) and the letter to the Chair of the Remuneration Committee from August 2021. The stage seems set for the FCA to look more often or more carefully than it has previously done at equal pay issues from a regulatory perspective. Whilst there is always scope for enforcement action, our view is that the FCA is more likely to use gender neutrality as a supervisory tool and may ask more detailed questions around gender pay.

Accordingly, while most firms are already considering their gender pay gap, data suggests that little progress has been made in recent years. The introduction of these new requirements may therefore present a positive opportunity for UK and EU-based entities to consider remuneration policies and practices from a gender equality perspective and identify any shortcomings.

EBA guidelines - a few points for in-scope EU investment firms to note

Monitoring: Investment firms should be able to demonstrate that the remuneration policy is gender neutral (para 24, the Guidelines). The EBA requires investment firms (like it has previously asked banks in the CRDV Guidelines) to “document appropriately” the value of a position by documenting job descriptions and determining which positions have an equal value (para 26, Guidelines). The EBA does not mandate a job classification system but gives this as an example of a tool for monitoring the application of gender-neutral remuneration policies. Firms will also be mindful of national legislative requirements in relation to equal pay (e.g. provisions in Spain which will apply to employers with 50 or more employees from March 2022).

Formal role for remuneration committee in gender pay: Any investment firm with assets valued at more than €100m over 4 years preceding the current financial year must establish a remuneration committee. The committee is specifically directed to consider gender neutrality as part of its supervisory role. The remuneration committee must also have a ‘balanced’ gender composition. However, the precise requirement imposed by the idea of ‘balance’ is not clear, because the guidelines are also clear that it doesn’t mean a 50% gender split (see page 93 of the guidelines).

Monitoring gender pay gap: The EBA Guidelines require firms to monitor their gender pay gap, presumably to identify trends and enable competent authorities to benchmark. It will not be sufficient for a firm to monitor the gender pay gap only on a firmwide basis. Firms must consider the gender pay gap for individual functions within management, identified staff, and all staff. The EBA have emphasised that they expect this not to impose a substantial additional burden on firms, as a lot of the data required is already collected (p 80). For firms with 50 staff or more, monitoring must also take place on a country-by-country basis.

Conclusion

The gender pay gap does not, unfortunately, seem to be narrowing, and we are increasingly seeing claims for equal pay in the UK. Employees and shareholders expect employers to take action and are more willing to blow the whistle if they feel there are fundamental issues with business structure. This makes it a hot topic for regulators and relevant from an ESG perspective. This combination of factors – regulatory pressure both in the UK and Europe and growing internal awareness – means that it is a good time to review remuneration policies from a gender pay perspective to ensure they are fit for purpose.