Covid-19 and dividend payments
Updated: 2 April 2020
ECB recommendation to directly supervised credit institutions
On 27 March, the ECB published a recommendation that at least until 1 October 2020 (when the situation will be reviewed) credit institutions:
- should not pay, or give an irrevocable commitment to pay, a dividend in respect of the financial year 2019 and 2020; and
- should not undertake a share buy-back for the purpose of remunerating shareholders.
Noting that credit institutions have various legal forms, (e.g. listed companies and non-joint stock companies such as mutuals, cooperatives or savings institutions), the recommendation clarifies that the term ‘dividend’ refers to any type of cash pay-out that is subject to the approval of the general assembly.
This recommendation applies to significant supervised groups on a consolidated basis and otherwise to significant supervised entities on a solo basis, when these are not part of a significant supervised group. (For these purposes significant supervised entities are credit institutions directly supervised by the ECB under the Single Supervisory Mechanism (SSM) broadly on the basis of size (assets exceed €30 billion), systemic importance, cross border impact or the where the institution has requested or received funding from the European Stability Mechanism or the European Financial Stability Facility. Significant supervised groups include significant supervised entities and are designated as such by the ECB.) However, the ECB also addresses the recommendation to national competent authorities confirming its expectation that they should adopt a similar approach with the less significant supervised entities / less significant supervised groups which they supervise.
Credit institutions that are unable to comply with this recommendation because they consider themselves legally required to pay-out dividends are required to explain why this is the case to their joint supervisory team.
Further to the ECB’s recommendation, on 31 March, the EBA clarified its expectations in relation to dividend and remuneration policies. In its statement, the EBA reiterated its call to credit institutions to:
- refrain from the distribution of dividends or share buybacks for the purpose of remunerating shareholders; and
- review their remuneration policies, practices and awards to ensure they are consistent with and sound and effective risk management and are in line with the risks stemming from the economic situation. According to the EBA statement, remuneration and, in particular, its variable portion should be set at a conservative level. To achieve an appropriate alignment with risks stemming from the COVID-19 pandemic the EBA say that a larger part of the variable remuneration could be deferred for a longer period and a larger proportion could be paid out in equity instruments.
The EBA noted that many national authorities have already communicated similar expectations to banks or are engaged in bilateral dialogues in order for banks to limit or refrain from dividend distribution and share buybacks.
PRA earlier announcement to all PRA-regulated firms in the UK
The PRA had announced its preliminary views on dividend payments in its statement on 11 March, at which stage it did not mandate an outright prohibition but said that it:
- expected firms not to increase dividends and other distributions (as a result of other measures being taken i.e. the reduction in the UK countercyclical capital buffer rate (“CCyB”) to 0%); and
- would monitor firms’ distributions against this expectation (and boards should take this into account when deciding distributions).
In the same statement, the PRA confirmed that a firm needed to ensure that any proposals or discussions relating to potential dividend or share buybacks were undertaken in a manner consistent with the firms’ safety and soundness objective, would need to be consistent with the obligations in the PRA’s Fundamental Rules (i.e. for a firm to “act in a prudent manner” and maintain adequate financial resources at all times) and be subject to a transparent governance process involving a Senior Manager identified to: (i) lead the discussion, oversight, and scrutiny of any proposals relating to dividend distributions or share buybacks relating to the reduction of the CCyB; and (ii) discuss these matters with the PRA if called upon to do so.
The announcement also stated that remuneration committee chairs (or equivalent under the Senior Managers regime) would need to take reasonable steps to ensure that:
- proposals to amend bonus pools directly or indirectly because of the CCyB reduction are properly discussed, recorded and subject to appropriate challenge (by the remuneration committee or board); and
- decisions relating to the bonus pools are consistent with the maintenance of a sound capital base, incentivise and reward prudent risk management and accurately reflect firm, business unit and individual performance.