Has the regulator implemented rules in relation to remuneration paid by banks to its staff?
Yes, rules in relation to remuneration paid by banks to its staff have been implemented in Germany:
The rules on remuneration introduced by the Capital Requirements Directive III (CRD III) in 2010 had been implemented mainly into the Remuneration Ordinance for Institutions (Instituts-Vergütungsverordnung), with some additional requirements set forth in the German Banking Act (Kreditwesengesetz – KWG). However, most banks found it difficult to apply these rules which led to the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) granting a non-official grace period, during which banks were not expected to have completely implemented the new rules but were required to show ongoing progress with this regard.
As of January 1, 2014, the remuneration rules set out in the Capital Requirements Directive IV have been transposed. A new Remuneration Ordinance for Institutions (Institutsvergütungsverordnung - InstitutsVergV) has been published, and several new requirements have been introduced in the KWG. In addition, the Commission Delegated Regulations (EU) No. 527/2014 (instruments) and No. 604/2014 (risk takers) directly apply, as well as art. 450 Capital Requirements Regulation (CRR) (disclosure). Whilst the BaFin did not expect institutions to have completed their implementation of the new requirements by January 1, 2014, it has become somewhat stricter following an earlier special audit which showed that institutions’ implementation of the CRD III requirements did not meet expectations.
Scope of application
Generally, all institutions within the meaning of the KWG are subject to at least some of the remuneration rules set forth in the KWG and InstitutsVergV. That includes, but is not limited to, credit institutions within the meaning of art. 4 para. 1 No. 1 CRR and investment firms within the meaning of art. 4 para. 1 No. 1 MiFID. However, the term “institution” has a fairly broad meaning under the KWG and covers all entities that require a license as a credit institution (Kreditinstitut) or financial services provider (Finanzdienstleistungsinstitut). For example, an entity with a license for lending business (Kreditgeschäft) and guarantee business (Garantiegeschäft) qualifies as a credit institution within the meaning of the KWG (but not as a credit institution within the meaning of art. 4 para. 1 No. 1 CRR), and an entity with a license for factoring (Factoring) qualifies as a financial services provider within the meaning of the KWG (but not as an investment firm within the meaning of art. 4 para. 1 No. 1 MiFID).
The InstitutsVergV distinguishes two groups of institutions, i.e. significant institutions and non-significant institutions. Whereas the general rules on remuneration apply to all institutions, certain staff members of significant institutions are subject to additional rules (which are the most cumbersome in practice). Basically, an institution is deemed to be significant if its balance sheet dates for the last three completed financial years reached or exceeded an average of EUR 15 billion, unless the institution provides the BaFin with a risk analysis proving that it is not significant. However, the BaFin may classify an institution as significant even if its balance sheet dates do not meet the aforementioned threshold, provided that this is necessary due to the institution´s remuneration structure and the nature, scale, complexity, risk content and international scope of its business activities. Besides, some institutions are generally considered as significant (e.g., banks that are subject to the ECB supervision under the single supervisory mechanism). In practice, the qualification as a significant institution is a crucial issue, and we have seen cases where the BaFin has ordered an institution to amend its risk analysis and to classify itself as significant.
What categories of staff are caught by the regulator’s rules?
Generally, the rules apply to all staff members that are involved in conducting banking business or rendering financial services; auxiliary staff (e.g., staff members in charge of facility management) are not covered. However, the application of the rules extends to staff members of service providers in so far as the staff members are directly involved in providing services to the institutions for the purpose of banking business/financial services, provided that the service provider belongs to the institution’s regulatory group. Whereas the limitation to group service providers (the first draft of the Instituts-Vergütungsverordnung 2010 did not provide for such limitation, but covered all service providers) is helpful, the application of the rules to service providers´ staff still causes some practical issues, which are generally resolved by a group-wide remuneration policy.
For significant institutions, stricter rules apply to so-called risk takers. A significant institution has to identify its risk takers on the basis of a risk analysis to be prepared by the institution. However, the BaFin may order the significant institution to revise its risk analysis, if it is not plausible, extensive and comprehensible to third parties. The criteria to be used in the risk analysis are set forth in the Commission Delegated Regulation (EU) No. 604/2014.
What are the key regulatory rules?
Since the German regime is based on CRD IV, the key regulatory rules set forth in the EU analysis apply as well.
A particularly topical issue is the prohibition of guaranteed variable remuneration. Although this is based on the CRD IV, the BaFin has a particularly strict view of the prohibition. For example,the BaFin is of the opinion that any payment that is not granted for the complete term of the employment contract is to be considered as guaranteed variable remuneration.
Are bonuses subject to the regulator’s rules?
Again, the principles set forth in the EU analysis apply, although some details may have been implemented differently.For example, in order to apply the notional discount factor to the bonus cap, the KWG requires a deferral period of at least five years.
In practice, the most cumbersome requirements are the deferral of at least 40% or 60% of the variable remuneration of risk takers or managing directors and staff on the level below managing director, respectively, for a period of at least three years, in connection with the further requirement to retain at least 50% of both, the deferred and the non-deferred part of the variable remuneration. Institutions tend to apply the minimum thresholds to all managing directors and relevant staff. However, the BaFin has provided some relief by introducing a threshold of EUR50,000 per staff member per year. If the variable remuneration does not reach this threshold, at least the deferral requirements (and probably the retention requirements as well) do not apply.
What is the position concerning role based allowances?
In principle, the BaFin takes the same view as the EBA (see the EU analysis). In particular, allowances granted for the interim holding of another (higher) role/position are not accepted, but considered as guaranteed variable remuneration.
Do the regulator’s rules on remuneration have extraterritorial effect?
A regulatory group has to establish a group-wide remuneration policy, which is to be applied to foreign subsidiaries as well, unless a foreign subsidiary is subject to stricter requirements under local state law.
With regard to non-EEA based banks, the position is the same as set forth in the EU analysis.
Do you anticipate further reform in this area?
Not for institutions. Note that there is another regulation due for fund management companies, which will be based on AIFMD and UCITS V.
Must an institution’s remuneration policy be disclosed to the regulator?
Reference is made to the EU analysis as well.
Note that institutions have to notify the regulator on an annual basis if the risk analysis resulted in the classification as significant institution, or in a change of this classification.