Germany


Do senior bank staff, including non-executive directors, have to be registered with your national regulatory authority?

Banks

Such requirements apply to banks' managing directors (Geschäftsleiter) and members of the Administrative or Supervisory Board (Mitglieder des Verwaltungs - oder Aufsichtsorgans), respectively:

(a) Managing directors

If a managing director is to be appointed, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) must be notified before and after the appointment. Technically, the appointment does not require the BaFin´s prior approval but if BaFin considers the candidate not to be fit and proper, it may demand their dismissal.

In order to avoid such dismissal, it is common practice to liaise with the BaFin and discuss the merits of the preferred candidate on an informal basis before any formal notification is filed. At this early stage, the BaFin will merely give a non-binding indication on its view of the candidate. If such indication is positive, the formal notification of the intention to appoint the candidate as managing director is submitted. The BaFin will then assess the candidate. If it concludes that the candidate meets all the necessary requirements the BeFin will issue a statement to this effect. While the legal nature of such a statement is not completely clear, the BaFin usually sticks with its assessment (although there have been exceptions). Thereafter, the candidate is appointed and finally, the BaFin is notified of the actual appointment.

(b) Members of the Administrative or Supervisory Board

Members of the Administrative or Supervisory Board may be appointed without prior notification to the BaFin. However, once a new member has been appointed, the BaFin must be notified of such appointment without undue delay. As is the case with managing directors, if the BaFin considers a new member of the Administrative or Supervisory Board not to be fit and proper, it may demand their dismissal. In practice, the candidate should therefore be presented to the BaFin beforehand particularly if there are any doubts with regard to reliability and/or qualification.

Other regulated entities

Regulated entities under the German Banking Act (Kreditwesengesetz - KWG) are credit institutions (“banks” – note that the scope of credit institutions under the KWG is wider than under the Capital Requirements Regulation (CRR)), financial services providers (Finanzdienstleistungsinstitute) and – to some extent – (mixed) financial holding companies. With regard to registration of senior staff, financial services providers are subject to the same rules as banks; these rules apply mutatis mutandis to (mixed) financial holding companies as well.

Similar requirements also apply to managing directors of payment institutions (Zahlungsinstitute) under the German Payment Services Act (Zahlungsdiensteaufsichtsgesetz - ZAG) and to managing directors of fund management companies (Kapitalverwaltungsgesellschaften) under the German Capital Investment Code (Kapitalanlagegesetzbuch - KAGB).

If your national regulatory authority requires registration of senior bank staff what are the requirements?

Banks

(a) Managing directors

The BaFin will apply the “fit and proper” test, i.e.:

(i) Qualification (“fit”)

Managing directors must have adequate theoretical and practical knowledge of the relevant business, as well as managerial experience.

The professional qualification is normally assumed if the prospective managing director can show three years of managerial experience with an institution of comparable size and business. Such managerial experience may be gathered in a position as a managing director or one level below. However, this is not compulsory. If the prospective managing director cannot show three years of relevant managerial experience, his qualification may still be otherwise proven. On the other hand, even if such managerial experience can be shown, the BaFin may reject the candidate (e.g., if he is known to have made serious professional mistakes).

(ii) Reliability (“proper”)

In most cases, reliability is not an issue. However, this becomes tricky if the candidate has been fined for his professional behavior.

(iii) Compatibility with other positions

Whereas the BaFin has never accepted part-time managing directors, stricter requirements have been introduced following the implementation of the CRD IV. It is now explicitly stated that managing directors have to ensure that they spend sufficient time in their position. Furthermore, there are now specific rules on incompatibility with other positions. In the future it is an administrative offense if a managing director dedicates not enough time to its duties as managing director or holds too many other managing positions or seats in supervisory boards.

(b) Members of the Administrative or Supervisory Board

Generally, the “fit and proper” test will be applied to members of the Administrative or Supervisory Board as well. However, whilst the reliability test is the same as for managing directors, the requirements on qualification are far less strict. Members of the Administrative or Supervisory Board have to ensure that they spend sufficient time in their position as well, and there are also rules on compatibility with other positions.

Other regulated entities

Senior staff of financial services providers are subject to the same requirements as senior staff of banks. These rules apply mutatis mutandis to (mixed) financial holding companies as well.

Similar requirements apply to managing directors of payment institutions under the ZAG and to managing directors of fund management companies under the KAGB.

Is there legislation specific to the banking sector that provides for penalties to be levied against senior staff for mis-managing a bank?

Banks

(a) Managing directors

Managing directors commit a criminal offense if they do not provide for certain strategies, procedures, functions and concepts, provided that BaFin has ordered the respective managing director to remedy such deficiency, the managing director does not comply with such order, and that such failure results in a threat to the bank´s continued existence. The KWG lists the areas in which such strategies, procedures, functions and concepts have to be implemented; e.g., failure to provide for the required risk controlling or compliance function may constitute a criminal offense (if the other above mentioned requirements are met).

New penalties have been introduced with effect as of January 2, 2014 (see question 4 below).

(b) Members of the Administrative or Supervisory Board

There are no corresponding penalties for members of the bank´s Administrative or Supervisory Board.

Other regulated entities

The new penalties apply to managing directors of financial services providers as well.

Under certain conditions, the new penalties apply to managing directors of superordinated enterprises of groups of institutions, (mixed) financial holding groups and institutions within the meaning of art. 4 CRR with regard to certain strategies, procedures, functions and concepts to be implemented in the group companies as well.

There are no corresponding penalties for senior staff of payment institutions under the ZAG and for senior staff of fund management companies under the KAGB.

What is the maximum amount the regulator can fine an individual?

If the managing director of a bank commits a criminal offense as described above, he shall be punished by a term of imprisonment of up to five years or by a fine in instances of (conditional) intent. If he acted (only) negligently, the punishment shall be imprisonment of up to two years or a fine. Such penalties will be imposed by the criminal courts (not BaFin).

Is there legislation in place that requires banks to have in place remuneration policies and practices that are consistent with effective risk management?

Banks

(a) Managing directors

In July 2010, the German Act on regulatory requirements on remuneration systems of financial institutions and insurance companies (Gesetz über die aufsichtsrechtlichen Anforderungen an die Vergütungssysteme von Instituten und Versicherungsunternehmen) came into force. With regard to banks, this Act inserted into the KWG certain basic requirements concerning a bank´s remuneration system. Further detailed requirements were introduced by the Regulation on the regulatory requirements on remuneration systems of financial institutions (InstitutsvergütungsverordnungInstitutsVergV) in October 2010. The rules on remuneration systems in the KWG and the InstitutsVergV have been revised by the implementation of CRD IV with effect as of January 1, 2014. After a further revision of the InstitutsVergV in 2016/2017 and a lengthy consultation process the amended version came into effect as of August 4, 2017.

The KWG and the InstitutsVergV provide for general requirements that apply to all banks (e.g., limitations on the granting of retention boni) and specific requirements that apply only to significant banks. Most burdensome in practice are the requirements to defer at least 40 % of variable remuneration over a period of at least 3 years; these requirements apply only to identified staff of significant banks. In some cases the percentage can even amount up to 60% and for a period of five years. The BaFin has provided some relief by introducing a de minimis exception for variable remuneration of less than euro 50,000. The new InstitutsVergV contains further a “claw back-rule” which obliges banks to ensure that they are entitled to reclaim variable remuneration which has already been paid out. Also, compensation payments for loss of office are now deemed to be variable remuneration which means that such payments are caught by the rules governing variable remuneration.

Compliance with the regulatory requirements on remuneration systems is checked as part of a bank´s annual audit and has also been the subject of special audits conducted by the BaFin. Generally, this issue has been one of the German regulatory hot topics over the past few years.

(b) Members of the Administrative or Supervisory Board

With regard to the members of the Administrative or Supervisory Board, the KWG requires only that the remuneration system does not produce conflicts of interest with regard to their supervisory task. The InstitutsVergV does not apply to members of the Administrative or Supervisory Board.

Other regulated entities

The requirements on remunerations systems set forth in the KWG and the InstitutsVergV apply to financial services providers as well.

There are no corresponding rules for (mixed) financial holdings companies and payment institutions.

German alternative investment fund managers are subject to the remuneration requirements set out in the Alternative Investment Fund Managers Directive.

Is there any legislation planned in your jurisdiction that will strengthen the accountability of senior bank staff?

Currently, there is no further legislation pending on this issue.