15.7.1 Malus and clawback

Malus or clawback arrangements are explicit ex post risk adjustment mechanisms where the investment firm itself adjusts remuneration of the identified staff member based on such mechanisms (e.g. by lowering awarded cash remuneration or by reducing the number or value of instruments awarded).

Without prejudice to the general principles of national contract or labour law, investment firms must be able to apply malus or clawback arrangements up to 100% of the total variable remuneration in accordance with Article 32(1)(m) of Directive (EU) 2019/2034 regardless of the method used for the payment, including deferral or retention arrangements.

Ex post risk adjustments should always be performance or risk-related. They should respond to the actual risk outcomes or changes to persisting risks of the investment firms, business line or staff’s activities. They should not be based on the amount of dividends paid or the evolution of the share price.

Investment firms should analyse whether their initial ex ante risk adjustments were sufficient, e.g. whether risks have been omitted or underestimated or new risks were identified or unexpected losses occurred. The extent to which an ex post risk adjustment is needed depends on the accuracy of the ex ante risk adjustment and should be established by the investment firm based on back-testing.

When setting criteria for the application of malus and clawback in accordance with Article 32(1)(m) of Directive (EU) 2019/2034, investment firms should also set a period during which malus or clawback will be applied to identified staff. This period should at least cover deferral and retention periods. Investment firms may differentiate between criteria for the application of malus and clawback. Clawback should in particular be applied in the case of fraud or other conduct with intent or severe negligence which led to significant losses.

Investment firms should use at least the initially used performance and risk criteria to ensure a link between the initial performance measurement and its back-testing. Investment firms should, in addition to the criteria set out in Article 32(1)(m)(i) and (ii) of Directive (EU) 2019/2034, use specific criteria including:

• a. evidence of misconduct or serious error by the staff member (e.g. breach of code of conduct and other internal rules, especially concerning risks);
• b. whether the investment firm and/or the business unit subsequently suffers a significant downturn in its financial performance (e.g. specific business indicators);
• c. whether the investment firm and/or the business unit in which the identified staff member works suffers a significant failure of risk management;
• d. significant increases in the investment firm’s or business unit’s economic or regulatory capital base;
• e. any regulatory sanctions, e.g. punitive, administrative, disciplinary or otherwise, where the conduct of the identified staff member contributed to the sanction.

Where malus can only be applied at the moment of vesting of the deferred payment, investment firms may choose, where possible, to apply clawback after paying out or vesting of the variable remuneration. The application of malus may not be possible where the derogation under Article 32(4) of Directive (EU) 2019/2034 applies as the requirement to defer variable remuneration is not applied; investment firms should ensure that clawback can be applied.

Malus and clawback arrangements should lead to a reduction of the variable remuneration where appropriate. Under no circumstances should an explicit ex post risk adjustment lead to an increase of the initially awarded variable remuneration or, where malus or clawback was already applied in the past, to an increase of the reduced variable remuneration.