Remuneration Policies in Financial Undertakings and Investment Firms

FINANSSTILSYNET Postboks 1187 Sentrum 0107 Oslo Circular Remuneration Policies in Financial Undertakings and Investment Firms CIRCULAR: 2/2020 DATE: 19.05.2020 THE CIRCULAR APPLIES TO: Banks Holding companies in financial groups Credit institutions Financing undertakings Investment firms Life insurance undertakings Non-life insurance undertakings

Remuneration Policies in Financial Undertakings and Investment Firms 2 | Finanstilsynet 1 Introduction Chapter 15 of the Financial Undertakings Act and Chapter 15 of the Financial Undertakings Regulations ("the Regulations") contain rules on remuneration policies. Undertakings must have a written remuneration policy that contributes to promoting good management and control of the risks in the undertaking, as well as counteracting excessive risk-taking and contributing to avoiding conflicts of interest. Chapter 15 Part I of the Regulations implements the requirements for remuneration policies arising from the EU Capital Requirements Directive (CRD IV), and applies to the following undertakings: • holding companies in financial groups • banks • credit institutions • financing undertakings • investment firms The rules in Part II apply to the following types of undertakings: • insurance undertakings • pension undertakings The revised Occupational Pension Directive (Directive (EU) 2016/2341, IORP II) contains new provisions on remuneration policies for pension undertakings. In the consultation paper of 31 January 2019 on the activity and supervision of pension undertakings (implementation of IORP II in Norwegian law), Finanstilsynet proposed changes to the Financial Undertakings Regulations § 15-10 on remuneration policies in pension undertakings. Since the revised Occupational Pension Directive has not yet been implemented in Norwegian law, rules for pension undertakings will not be discussed further in this circular. Based on Article 94(2) of the Capital Requirements Directive, two Commission Delegated Regulations concerning remuneration have been established. Commission Delegated Regulation 604/2014 sets out quantitative and qualitative rules to be used to define categories of employees who have activities that have a material impact on the risk profile of the undertaking. The application of the Commission Delegated Regulation is discussed further in section 3.1 of the circular. Commission Delegated Regulation 527/2014 sets out rules on which types of instruments sufficiently reflect the undertaking's credit quality on a going concern basis and are suitable for use for variable remuneration. The rules on remuneration policies in insurance undertakings follow from Delegated Commission Regulation 2015/35, which supplements the rules in the Solvency II Directive. The Regulation has been made into Norwegian law through reference in the Solvency II Regulations § 53. Finanstilsynet's follow-up of the remuneration rules will be risk-based and will take place, among other things, as part of on-site supervision and by spot checks. Furthermore, guidelines from the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) will form the basis for Finanstilsynet's follow-up of undertakings' remuneration policies.

Remuneration Policies in Financial Undertakings and Investment Firms Finanstilsynet | 3 Both EBA and EIOPA have, in connection with the outbreak of COVID-19 and the measures implemented in connection with it, expressed that undertakings must ensure that remuneration policies promote good risk management and reflect the current economic situation. Remuneration, and especially the variable part, should be set conservatively. Undertakings should consider increasing the part of variable remuneration that cannot be freely disposed of, and/or extending the deferral period. See EBA statement of 31 March 2020 and EIOPA statement of 2 April 2020. This circular replaces Circular 15/2014. 2 General Rules 2.1 Types of remuneration covered Remuneration is the same as "salary and other remuneration" as stated in the Public Limited Liability Companies Act § 6-16a. This includes salary and other remuneration in the form of: • benefits in kind • bonuses • allocation of shares, subscription rights, options and other forms of remuneration linked to shares or the development of the share price in the company or in other companies within the same group • pension schemes • early retirement schemes • all forms of variable elements in remuneration, or special benefits that come in addition to the basic salary. Whether a remuneration should be considered fixed or variable must be assessed concretely. A remuneration will generally be considered fixed when • the allocation and size are based on predetermined, non-discretionary criteria, • the remuneration reflects the employee's position level, responsibility and experience, • it cannot be repaid, reduced or annulled by the undertaking, • does not give incentives for risk-taking and is not linked to performance achievement. 2.2 Exceptions Finanstilsynet assumes that extra payments or benefits to the employee that do not exceed one and a half months' salary per year are not covered by the remuneration rules. Undertakings can either use a uniform percentage or a uniform amount for all employees. If a uniform amount is used for all employees, the monthly salary of the employee with the lowest salary shall be used as the basis for the calculation.

Remuneration Policies in Financial Undertakings and Investment Firms 4 | Finanstilsynet The benefit or extra payments must be part of a general, non-discretionary policy, which covers the entire undertaking, and which does not give incentive to take risk on behalf of the undertaking. 2.3 Which employees are covered Undertakings must have guidelines and frameworks for remuneration policies for all employees. Special requirements for remuneration policies are described in sections 3 and 4, and will apply to: • senior management • employees with activities of significant importance for the undertaking's risk exposure • employees with control activities. In credit institutions and investment firms, special requirements also apply to board members with activities of significant importance for the undertaking's risk exposure as well as board members with control activities. 2.4 The Board and Remuneration Committee The Board shall establish and ensure that the undertaking at all times has and practices guidelines and frameworks for a remuneration policy that applies to the entire undertaking and its subsidiaries. The remuneration policy must be in accordance with the undertaking's overall objectives, risk tolerance and long-term interests. In the design and follow-up of the undertakings' remuneration policy, the administration/ management shall present input from all relevant functions to the Board, for example risk management functions, compliance functions, HR and central functions for strategic planning. In investment firms, advice from the compliance function must be obtained before the remuneration policy is established. The remuneration policy should be written and available to all employees. Undertakings with more than 50 employees and undertakings with managed capital exceeding five billion NOK must have a separate remuneration committee appointed by the Board. The Remuneration Committee must have at least one representative for the employees and shall otherwise consist of the whole or part of the Board. Senior management should not be part of the Remuneration Committee. The Committee must have sufficient knowledge and experience with risk analysis to be able to assess whether the remuneration policy is appropriate. Finanstilsynet recommends that the undertaking's control functions be given the opportunity to give opinions to the Remuneration Committee on the undertaking's procedure for determining risk-adjusted results, cf. section 3.3.1. The requirement for a Remuneration Committee does not exempt the Board from the overall responsibility for handling risks associated with variable remuneration.

Remuneration Policies in Financial Undertakings and Investment Firms Finanstilsynet | 5 The undertaking must review the practice of the remuneration policy at least once a year. A written report must be prepared after each review, which must be reviewed by independent control functions. 2.4.1 Vesting Period The purpose of the Regulations implies that the basis for variable remuneration linked to the undertaking's risk-adjusted results should be a period of at least one year, and that the vesting period should not be shorter than one year. Special rules for vesting and basis for calculation apply to senior management etc. The rules are described in section 3.3. 3 Special Requirements for Remuneration Policies in Credit Institutions and Investment Firms The Financial Undertakings Regulations § 15-4 contains special requirements for remuneration of senior management in credit institutions and investment firms. The requirements apply correspondingly to employees with activities of significant importance for the undertaking's risk exposure, employees with control activities and board members, cf. the Regulations §§ 15-5 to 15-7. 3.1 Identification of employees covered by the special requirements 3.1.1 Senior Management The following categories of employees will normally be covered by the concept of senior management: • managing director • other members of the management group • managers of significant business areas / geographical areas • managers of business areas or functions that have significant importance for the undertaking's risk exposure, e.g. liquidity management, credit granting, capital management, asset allocation • managers of control functions, e.g. risk management, compliance function and internal audit 3.1.2 Other employees with activities of significant importance for the undertaking's risk exposure When deciding whether an employee should be considered an employee with activities of significant importance for the undertaking's risk exposure, the undertaking must use the qualitative and quantitative criteria that follow from Commission Delegated Regulation 604/2014.1 An employee is considered to have a significant impact on the undertaking's risk profile if one or more of the criteria in the Regulation are met. 1 Note that EBA has sent a draft of a new technical standard for consultation. As planned, EBA will submit a final report to the EU Commission in June 2020.

Remuneration Policies in Financial Undertakings and Investment Firms 6 | Finanstilsynet Regarding the quantitative criteria, it follows from Article 4 of Commission Delegated Regulation 604/2014 that a person is considered a risk-taker if they were awarded a total remuneration of 500,000 euros or more in the previous financial year, belonged to the 0.3 percent of employees in the undertaking who were awarded the highest total remuneration, or were awarded total remuneration equal to or higher than a member of the undertaking's executive management. Remuneration awarded in a currency other than euros must be converted to euros by using the exchange rate that the undertaking has used when preparing consolidated accounts, or the exchange rate quoted by Norges Bank for the month in which the remuneration was awarded or at year-end. The undertaking must document which method has been used for the conversion. The undertaking may determine that the person who meets one of the quantitative criteria is not considered a risk-taker if one of the conditions in Article 4(2) is met. Undertakings that exempt employees who received total remuneration of 500,000 euros or more in the previous financial year must notify Finanstilsynet of this, cf. Article 4(4). The notification must state on what basis the undertaking has assessed that the person meets one of the conditions in paragraph 2. For certain groups of employees, prior approval from Finanstilsynet is required to exempt them from being considered risk-takers, cf. Article 4(5). This applies to: • employees who were awarded a total remuneration of 750,000 euros or more in the previous financial year • employees who are among the 0.3 percent with the highest total remuneration in the previous financial year The undertaking must demonstrate in the application to Finanstilsynet that one of the conditions in Article 4(2) is met. If the employee was awarded a total remuneration of 1,000,000 euros or more in the previous financial year, prior approval is only granted in extraordinary cases. Before the application is decided, Finanstilsynet must submit it to EBA. In the calculation of income for the previous financial year and the practice of notification and application for prior approval, Finanstilsynet will base itself on points 5 and 5.1 of EBA's Guidelines 2015/22 ("Guidelines on sound remuneration policies"). This means, among other things, that: • Total remuneration awarded (but not necessarily paid) in the previous financial year is relevant. • Notification must be submitted no later than six months after the end of the previous financial year. • Application for prior approval must be submitted as soon as possible, and no later than six months after the end of the previous financial year. Finanstilsynet should, as far as possible, process the application within three months after receipt of complete documentation. • For income that is subject to notification but not application, notification must be submitted in the first year the notification obligation arises. In subsequent years, new notification is not necessary, unless there are changes in the employee's business unit.

Remuneration Policies in Financial Undertakings and Investment Firms Finanstilsynet | 7 • For income that is subject to application, the application must be submitted for each year the threshold for application obligation is exceeded. The first time an application is made, it covers the current and subsequent year. The next time an application is made, it covers only the subsequent year. 3.1.3 Employees with control activities Employees with control responsibilities according to the Financial Undertakings Regulations § 15-6 will normally include central employees within internal audit, compliance and risk management functions. Remuneration to employees with control responsibilities must be independent of the result of the business area they control. 3.1.4 Reporting Notification and application for prior approval mentioned in section 3.1.2 must be sent to Finanstilsynet by email to: post@finanstilsynet.no. A selection of banks and investment firms must report data that is part of an annual benchmark survey organized by EBA. See description on Finanstilsynet's website. 2 3.2 Requirements for the ratio between fixed and variable remuneration The composition of fixed and variable remuneration must be balanced, but still such that certain limits apply to how large the variable part can be, cf. discussion below. Furthermore, the fixed part of the remuneration must be high enough so that the undertaking can choose not to pay the variable part of the remuneration. The undertaking must concretely assess what constitutes sufficiently high fixed remuneration. Variable remuneration must not exceed 100 percent of the fixed remuneration. The General Meeting, or equivalent body, may however decide that the limit can be increased to 200 percent if the requirements for processing in the undertaking's governing bodies etc. in the Financial Undertakings Regulations § 15-4 second paragraph are met. Finanstilsynet must be informed in accordance with the requirements in the provision. The limitation of 100 (or 200) percent does not apply to investment firms that are not covered by CRD IV, cf. the Regulations § 15-1 second paragraph. For the managing director and the members of the management group in a bank, variable remuneration cannot exceed half of the fixed remuneration. 3.2.1 Discounting In the Financial Undertakings Regulations § 15-4 tenth paragraph, undertakings are given the opportunity to perform a discounting of up to 25 percent of the variable remuneration to i) senior management and ii) managing director and members of the management group in a bank. 2 https://www.finanstilsynet.no/rapportering/fellesrapporteringer/crd-iv-rapportering-av-godtgjorelse/?parent=5908

Remuneration Policies in Financial Undertakings and Investment Firms 8 | Finanstilsynet This applies on the condition that this variable remuneration is paid out in instruments with a maturity of at least five years, and which can only be freely disposed of by the individual employee with a proportional share distributed over a period of at least five years. The instruments must further be subject to corresponding regulatory provisions that apply to deferred variable remuneration. In the calculation of the variable remuneration according to the Regulations § 15-4 tenth paragraph, Finanstilsynet has established that undertakings can use a discounting factor in accordance with the principles in EBA's Guidelines 2014/01 ("Guidelines on the applicable notional discount rate for variable remuneration"). Example 2 in the aforementioned recommendation shows how discounted value should be calculated for the part of variable remuneration that meets the conditions in the Regulations § 15-4 tenth paragraph. Discounted value must be calculated at the time the instruments are decided to be awarded. The formula to be used is shown in Example 2 on page 21 of EBA's guidelines. 3.3 Determination of Variable Remuneration According to the Financial Undertakings Regulations § 15-4 fifth paragraph, variable remuneration must be based on a combination of assessment of the employee's performance and results, the business unit's results and the undertaking's results. The undertaking's results from different business areas vary over time. The undertaking's results and employees' contribution to this must be measured over a period that is long enough to capture fluctuations. The measurement period must therefore be adapted to the undertaking's business cycle. The period must be at least two years. 3.3.1 Assessment of the undertaking's financial results Finanstilsynet assumes that the starting point for determining variable remuneration should be risk-adjusted results. The process for determining remuneration must take into account all risks that follow from the undertaking's activities, including costs associated with necessary capital and liquidity. Undertakings must assess which method is best suited for determining risk-adjusted results, depending on the size, complexity and type of activity. Examples of methods that may be relevant to apply are: • risk-adjusted return on capital (RAROC) • return on risk-adjusted assets (RORAC) • normalized return calculated over several years • accounting results adjusted for business cycles To arrive at risk-adjusted results, a number of subjective assessments must be made. Since transparency and the possibility to control how the undertaking determines its variable remuneration is important, the assessments and adjustments must be documented. 3.3.2 Assessment of the employee's results The employee's results must be assessed based on predetermined financial and non-financial criteria.

Remuneration Policies in Financial Undertakings and Investment Firms Finanstilsynet | 9 Financial criteria can, for example, be results and goal achievement in the undertaking, in the relevant department or for the individual employee. To the extent possible, the undertaking should use the same financial criteria for the employee's performance as used for all performance assessment, i.e. risk-adjusted results. Non-financial criteria can, for example, be achievement of strategic goals, customer satisfaction, compliance with internal or external rules, leadership, teamwork, creativity, motivation and cooperation with other business units, internal control functions and corporate functions. To have as great an effect as possible on the employee's behavior, the criteria used should be linked to the employee's decisions and ability to influence the outcome. 3.4 Payment of Variable Remuneration 3.4.1 Allocation of shares etc. At least half of the annual variable remuneration – or at least 60 percent when the variable remuneration constitutes a very large amount in light of, among other things, the undertaking's activities and the salary level in the undertaking – must be given in the form of shares or other equity instruments issued by the undertaking or another undertaking in the group, or in the form of contingent capital that reflects the undertaking's value development. The funds cannot be freely disposed of by the employee earlier than evenly distributed over a period of at least three years, cf. the Financial Undertakings Regulations § 15-4 sixth paragraph. The variable remuneration given in the form of instruments that cannot be freely disposed of must consist of a suitable balance of: a) shares or other equity instruments issued by the undertaking or another undertaking in the group, or other restricted funds for non-listed undertakings, and b) if possible, other instruments that meet the conditions in Commission Delegated Regulation No. 527/2014. 3.4.2 Adjustment of Deferred Payment Variable remuneration that is not paid out immediately must be reduced if the result development in the undertaking or subsequent results suggest this, cf. the Financial Undertakings Regulations § 15-4 sixth paragraph. Variable remuneration must only be paid out if it is reasonable from the undertaking's overall economic position. Before each payment, a risk adjustment must be made, i.e. a risk coordination mechanism where remuneration is reduced using malus arrangements or clawback clauses, for example by reducing restricted funds, or by awarding fewer number of instruments. The risk adjustment must be performance-related. Techniques that, for example, are based on the size of dividends or changes in share price, will not be sufficient. Malus is a method that gives the undertaking the opportunity to reduce the entire or part of the deferred part of variable remuneration based on subsequent risk adjustments. The effect of this assessment cannot be reduced by paying out an artificially high interest rate (above market rate) on the deferred part of the remuneration. Employees covered by the special requirements for remuneration policies cannot have insurance schemes against loss of performance-based remuneration. 4 Remuneration Policies in Insurance Undertakings Remuneration policies in insurance undertakings must, in addition to the general requirements in the Financial Undertakings Act, meet the requirements in the Solvency II Regulations § 53, which stipulates that the delegated Commission Regulation 2015/35 applies as regulations. According to the Regulation Article 258(1)(l), insurance undertakings must have written guidelines for remuneration policies. Article 275 describes the principles that must form the basis for the guidelines on remuneration policies. The requirements have similarities with the requirements that apply to credit institutions and investment firms, but are less detailed. EIOPA expressed in a statement of 7 April 2020 expectations for the follow-up of national supervisory authorities on remuneration policies. Insurance undertakings must have guidelines and frameworks for remuneration policies for all employees. The guidelines must contain special rules for remuneration to members of administration, management and control bodies3 , persons who actually manage the undertaking or exercise other central functions, as well as other categories of employees whose activities have a significant impact on the undertaking's risk profile. The points below discuss these special requirements. 4.1 Requirements for the ratio between fixed and variable remuneration The composition of fixed and variable remuneration must be balanced. Furthermore, the fixed part of the remuneration must be high enough so that the undertaking can choose not to pay the variable part of the remuneration. The undertaking must concretely assess what constitutes sufficient high fixed remuneration. 4.2 Determination of Variable Remuneration Variable remuneration must be based on a combination of assessment of the employee's performance and results, the business unit's results and the undertaking's results. In the assessment of an employee's results, pre-defined financial and non-financial criteria must be taken into account. Furthermore, the unit/undertaking's results must be risk-adjusted. The discussion in sections 3.3.1 and 3.3.2 of this circular applies correspondingly to insurance undertakings. 3 Employees with control responsibilities according to Article 275(2)(h) include the risk management function, compliance function, internal audit function