MiCAR Series: Week 4 – Remuneration policy governance for Asset Referenced Tokens (ARTs)

The European Banking Authority (EBA), together with the European Securities and Markets Authority (ESMA), has issued a consultation paper on the remuneration process under MiCAR. This is important for issuers of Asset Referenced Tokens (ARTs), as it clarifies how remuneration policies should be implemented to promote effective risk management. The paper also details the minimum governance arrangements required for these remuneration policies.

MiCAR, published on the 29 June 2023, aims to ensure safe and regulated access to the EU market for crypto assets. The draft regulatory technical standards (RTS) proposed under MiCAR set out further obligations for issuers of ARTs. These standards aim to prevent remuneration processes that could create a conflict of interest or incentives that may lead staff to favour personal or issuer interests over those of ART holders. This RTS sets out the key governance processes for remuneration policies.

MiCAR, published on the 29 June 2023, aims to ensure safe and regulated access to the EU market for crypto assets. The draft regulatory technical standards (RTS) proposed under MiCAR set out further obligations for issuers of ARTs. These standards aim to prevent remuneration processes that could create a conflict of interest or incentives that may lead staff to favour personal or issuer interests over those of ART holders. This RTS sets out the key governance processes for remuneration policies.

Governance Requirements

The management body of the ART issuer is responsible for approving any changes to the remuneration policy. They must review the policy annually and effective risk and compliance functions are in place. Remuneration policies must also follow specific criteria relating to gender neutrality, Economic, Social and Governance (ESG) factors and risk and compliance to avoid conflict of interests, while ensuring the policies are in line with the views of the holders of these ARTs. Conflict of interests can be avoided by ensuring the remuneration policies are always available to the staff, are clear and concise and do not encourage excessive risk-taking activities. It should also include a distinction between basic and variable remuneration.

To further mitigate risks, issuers of ARTs must identify individuals who have a significant impact on their risk profile, who will then be flagged if they perform any management duties for the following groups:

• Senior management
• Related business unit sales or marketing
• Data protection officers
• Risk
• ICT technology/security
• Anti-money laundering
• Asset management
• ARTs functions
• Policy development
• Finance
• Legal
• White paper establishment
• Human Resources

Remuneration policy standards

Issuers of ARTs must ensure their remuneration policies:

• Link variable remuneration with performance.
• Include risk adjustment measures.
• Guarantee variable remuneration only for new staff in their first year.
• Align all remuneration packages with the issuers long-term interests.
• Reflect performance in the early termination payments.
• Balance fixed and variable remuneration, with control functions’ variable remuneration is linked to control objectives.
• At least 50%[1] of variable remuneration is comprised of any of the below:
  • Shares
  • Share-linked instruments
  • Significant ARTs issued by the issuer.
• Defer at least 40%[2] of variable remuneration for at 3-5 years, except for when the variable remuneration proportion is over 60%.
• Ensure the deferred portion will not vest within 12 months after deferral and that no interest or dividend is paid until the instrument has vested.

These standards aim to further help issuers of ARTs prepare remuneration policies which are fair, effective and mitigate risk.

To recap on the rest of our MiCAR series, just click the links below:

Week 1

Week 2

Week 3

How can we help?

At Forvis Mazars, our Prudential Risk experts understand that regulations are a pivotal driver for the strategic priorities of financial institutions. We specialise in helping clients within the financial services sector navigate complex regulations. Our team work alongside our clients to identify their regulatory responsibilities and develop strategies for full compliance.
 

[1] Where more than 50% of the deferred part is paid out in instruments, less than 50% may be paid on the non-deferred part, if the net total of 50% for instruments is met. Does not apply if variable remuneration is less than €50,000 and is less than a quarter of their total annual remuneration.

[2] Does not apply if variable remuneration is less than €50,000 and is less than a quarter of their total remuneration.