On 19th February 2021, the Central Bank of Ireland updated the question and answer addressed to the investment firm sector on the payment of distributions and variable remuneration.
This Q&A is also addressed to MiFID market operators.
Can Insurance firms continue to make dividend distributions or create obligations to pay variable remuneration in the current circumstances?
The Central Bank core focus is on ensuring that the financial system can continue to provide services to households and business in this difficult time. The impact of COVID-19 on solvency and liquidity positions of insurance firms remains uncertain, but it may still be significant for many of the insurance firms under supervision. In this context, CBI consider that insurance firms should continue to postpone payments of dividend distributions or similar transactions until they can forecast their costs and future revenues with a greater degree of certainty. Where the board of an insurance firm forms the view that a high level of certainty has been reached and wishes to make a distribution, the Bank expects the firm to engage with their supervision team before proceeding with the distribution, demonstrating satisfactory forward looking solvency, liquidity and operational resilience positions in light of the current environment.
Furthermore, firms are expected to continue to exercise prudence in respect of their variable remuneration policies, including considering whether postponement of related payments would be appropriate during this time.
For more significant insurance firms, in addition to the above mentioned expectations, the Bank also expects that, between 1 January 2021 and at least until 30 September 2021, total dividends, share buy-backs and variable remuneration to material risk takers should in no event result in a reduction in solvency ratio of more than 15 percentage points from its pre-distribution solvency ratio, and overall distributions should be significantly lower than in recent years prior to the COVID-19 crisis.
This approach is consistent with the statement published by EIOPA on 2 April 2020, its’ press release entitled “EIOPA outlines key financial stability risks and vulnerabilities for insurance and pension sector and recommends that any dividend distributions should not exceed thresholds of prudency”, published on 18 December 2020, and the updated Recommendation 2020/15 of the ESRB, also published on 18 December 2020.
Can MiFID investment firms and market operators continue to pay distributions and variable remuneration in the current circumstances?
The Central Bank’s core focus is on ensuring the stability of the financial system so that it can continue to provide services to the economy in this difficult time. The impact of COVID-19 on MiFID investment firms and market operators remains uncertain. In this context, the Central Bank considers that MiFID investment firms and market operators should continue to apply a conservative approach to dividends and other distributions in the light of the continued uncertainty surrounding the COVID-19 pandemic.
All MiFID investment firms and market operators are requested to exercise a high degree of prudence if considering making any distributions (dividend distributions, or giving an irrevocable commitment to make a dividend distribution, or buying back ordinary shares) until they can forecast their costs and future revenues with a high degree of certainty.
All MiFID investment firms and market operators should be in a position to evidence that they have immediate access to sufficient financial resources to meet all of its capital and liquidity requirements post-distribution (including where the firm has created a new obligation to pay variable remuneration to a material risk taker) over an extended period of time.
MiFID investment firms subject to CRD IV/CRR are also expected to exercise a high degree of prudence in respect of any proposal to create an obligation to pay variable remuneration to a material risk taker.
All MiFID investment firms which are subject to CRD IV/CRR and designated as “Medium-High” or above under the Central Bank’s Probability Risk Impact System (PRISM) should engage with their supervision team, in good time before proceeding with any distribution (including creating a new obligation to pay variable remuneration to a material risk taker).
Additionally, MiFID market operators designated as “Medium-High” or above under PRISM should also engage with their supervision team, in good time before proceeding with any distribution.
Can credit institutions continue to pay distributions and variable remuneration in the current circumstances?
The Recommendation of the European Central Bank (ECB) of 15 December 2020 on dividend distributions during the COVID-19 pandemic (ECB/2020/62) (the “ECB Recommendation”), continues to encourage credit institutions to refrain from paying dividends or performing share buybacks aimed at remunerating shareholders, but in any event recommends that credit institutions should exercise extreme prudence when deciding on or paying such distributions until 30 September 2021. According to the Recommendation, credit institutions should be guided in their deliberations by their internal capital generation capacity viewed on a forward-looking basis, and the upcoming impact of the economic fallout on the quality of their exposures and capital, with distributions expected not to exceed the lower of 15 % of the credit institution’s accumulated profit for the financial years 2019 and 2020 and 20 basis points in terms of its Common Equity Tier 1 ratio.
National competent authorities, such as the Central Bank, are expected to apply this recommendation to entities under their supervision, as deemed appropriate, in order to maximise support to the real economy. Credit institutions under the prudential supervision of the Central Bank that intend to decide on or pay out dividends or perform share buy-backs aimed at remunerating shareholders should contact their supervisor to discuss whether the level of intended distribution is prudent.
The Central Bank also expects that credit institutions continue to adopt a prudent, forward-looking stance when deciding on their remuneration policies, in line with communications from the ECB to significant institutions, the EBA press release “The EBA continues to call on banks to apply a conservative approach on dividends and other distributions in light of the COVID-19 pandemic” of 15 December 2020 and the Recommendation of the European Systemic Risk Board (ESRB) of 15 December 2020 on restriction of distributions during the COVID-19 pandemic (ESRB/2020/15).
In particular, credit institutions should adopt a prudent approach with regard to variable remuneration payments until 30 September 2021, especially to identified staff (so-called “material risk takers”). The Central Bank expects less significant institutions to consider the extent to which it is possible to limit payments of variable remuneration, and where not possible, to consider whether a larger part of variable remuneration could be deferred for a longer period or paid out by means of instruments. Insofar as it may negatively affect the amount or quality of total capital, credit institutions should ensure that amounts distributed (in combination with dividends and share buybacks during the same period) do not exceed the lower of 15 % of the credit institution’s accumulated profit for the financial years 2019 and 2020 and 20 basis points in terms of its Common Equity Tier 1 ratio.
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