RMA Warns of Incentive Compensation Rule’s Unintended Consequences

Philadelphia, PA (July 25, 2016) —

The Risk Management Association (RMA) has filed a comment letter with the Federal Reserve Board, OCC, FDIC, and other regulatory agencies regarding the proposed rule restricting Incentive-based Compensation Arrangements, saying the proposal is overly prescriptive and warning of harmful unintended consequences.

In addition to causing a flight of bank talent to fintech and other unregulated areas, RMA notes that the proposed rule could cause liquidity dampening, credit market tightening, and the stifling of innovation. The agencies released the proposed rule on a staggered basis despite a Dodd-Frank Act directive that they issue regulations or guidance jointly, the letter says. The agencies then adopted the same expiration date for the comment period, July 22, 2016, creating an “exceedingly narrow comment window.” RMA is seeking that the period be extended so that it ends 90 days from the June 10, 2016, publication of the proposed rule in the Federal Register.

Despite the limited time to review the proposed rule, RMA suggested several improvements, including making the rule more principles-based rather than prescriptive, and allowing institutions to interpret definitions as appropriate given their size, scale, complexity, risk profile, and business model. 

RMA commented that incentive-based compensation programs are an important tool used by the financial services industry to retain talent, inspire better performance, and foster innovation that is key as banks compete with fintechs and other disruptors. As written, RMA says, the proposed incentive compensation rule would harm banks’ efforts in those areas through language that is overly broad and overly prescriptive, and would go beyond the Dodd-Frank Act’s goal of discouraging inappropriate risks.  

The letter notes, for example, that the proposed rule would apply to incentive-based compensation for executives “in the position of risk-mitigating, not risk-taking.” Among other concerns, the RMA letter calls the clawback period, which could extend to 11 years from the vesting date, “excessive” and “unduly burdensome.” RMA argues instead for a period in the range of 5 ½ to 7 years from the beginning of the performance period, which is consistent with the length of the typical business cycle.

In closing, the letter says “institutions should have the flexibility to determine how to address inappropriate risk-taking in a manner consistent with their respective needs and applicable state laws.”   

The letter was filed with the following agencies:

  • The Board of Governors of the Federal Reserve System
  • The Federal Deposit Insurance Corporation
  • The Federal Housing Finance Agency
  • The National Credit Union Administration
  • The Office of the Comptroller of the Currency
  • The Securities and Exchange Commission 

About RMA
Founded in 1914, The Risk Management Association is a not-for-profit, member-driven professional association whose sole purpose is to advance the use of sound risk management principles in the financial services industry. RMA promotes an enterprise approach to risk management that focuses on credit risk, market risk and operational risk. Headquartered in Philadelphia, Pennsylvania, RMA has 2,500 institutional members that include banks of all sizes as well as nonbank financial institutions. They are represented in the Association by 18,000 individuals located throughout North America, Europe, Australia, and Asia/Pacific.

Media Contacts
Stephen Krasowski, skrasowski@rmahq.org, 215-446-4095
Frank Devlin, fdevlin@rmahq.org, 215-446-4137