BT8 MaComp 2024

With the update of BT8 MaComp 2024, BaFin is incorporating the updated guidelines on MiFID II remuneration requirements published by ESMA on 31 March 2022 ESMA35-43-5605, „ESMA Guidelines“ into its administrative practice. With effect from 28 February 2024, BT8 MaComp 2024 replaced the previous regulation in force since the last revision in May 2023.

From a supervisory perspective, BT8 MaComp and the ESMA Guideline concretise the requirements set out in Articles 27 and 34 of Commission Delegated Regulation 2017/565 ("DelVO") in conjunction with Art. 23 (4) of Directive 2014/65/EU (MiFID II) and in Sections 63 (3), 80 (1) sentence 2 no. 2, 81 (2) sentence 2 no. 3 of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) to take sufficient account of client interests in the content of the remuneration systems and the corresponding requirement to ensure that these are not adversely affected by the remuneration systems. From the perspective of legal methodology, the MaComp includes an administrative regulation interpreting standards and not a substantive law. Nevertheless, they must be observed by those applying the law, as they are de facto legally binding (to a certain extent) through BaFin's self-binding nature as so-called soft law.

From a legal methodology perspective, it must also be taken into account that BaFin had already issued the relevant declaration pursuant to Art. 16 (3) sentence 2 of Regulation 1095/2010 establishing ESMA at the end of 2023 to comply with the ESMA Guidelines. Against this background, the legal principles published in the ESMA Guidelines must also be taken into account when interpreting BT8 MaComp.

BaFin has systematically reorganised BT8 MaComp and now divides it into the provisions on the scope of application and the relationship to other regulatory (statutory) provisions (BT 8.1), the provisions on the content of the remuneration systems (BT 8.2) and the provisions on remuneration governance (BT 8.3 and 8.4).

1. Extension of the personal scope of application of the relevant persons

BaFin has extended the personal scope of application of BT8 MaComp, which now covers not only employees in an employment relationship with the WPDU, but also external natural persons who are involved in the investment services and activities provided by the WPDU (BT8 1.2 MaComp in conjunction with Art. 2 No. 1 DelVO). According to BT8 1.2 MaComp in conjunction with Art. 27 (2) DelVO, the specific personal scope of application covers Art. 27 (2) DelVO covers all relevant persons who have a direct or indirect influence on the securities and ancillary services provided by the WPDU or the entrepreneurial behaviour, insofar as the remuneration of these persons may lead to a conflict of interest that at least causes them to act against the interests of the WPDU's clients. In addition to these relevant persons, BaFin also includes the control functions of risk management and internal audit in the new regulatory framework of BT 8.2.4 MaComp for the first time.

2. The supervisory principle of subsidiarity

The revised BT8 MaComp continues to follow the regulatory principle of subsidiarity (BT 8.1.1) with regard to the content of the requirements for remuneration systems and remuneration governance. Accordingly, BT8 MaComp takes a back seat to the regulatory legal provisions applicable to the WPDU's remuneration systems if BT8 contradicts them. 

The specific application of this guiding principle must be based on the general canon of legal methodology, which, in addition to the wording, includes the overall system and purpose of the relevant statutory provisions. 

When assessing the scope of subsidiarity in relation to the specific statutory scope of regulation, it should be noted that the provisions of BT8 MaComp focus on the remuneration-related risks arising from the specific activity of the individual employee covered by BT8 MaComp for the legal position of the WPDU's clients. The protective purpose of BT8 MaComp is - solely - focused on these remuneration-related client interests. It is intended to avoid remuneration-related conflicts of interest and ensure compliance with the rules of conduct. 

In addition, from a legal system perspective, it must be taken into account that in the consultation procedure on the ESMA guidelines, ESMA has once again confirmed the need repeatedly expressed by practitioners for a holistic and consistent regulatory framework for the remuneration systems of the respective (investment services) companies in the financial market ("Single Book of Sound Compensation") (including in the final report on the consultation procedure of 31 March 2022, for example under Annex IV (3)).

This requires the following guidelines for the application of the subsidiarity principle in relation to the individual statutory provisions:

• For WPDUs that also qualify as institutions within the meaning of Section 1 (1) sentence 1 IVV and whose remuneration systems are subject to the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung, IVV) and the other relevant regulatory provisions of Section 25a KWG and the underlying Directive 2013/36/EU (in the version of Directive 2019/878/EU (CRD V, see our  Client Alert): The core purpose of these statutory regulations is to incentivise individual employees in monetary terms to behave in accordance with the institution's sustainable business and risk strategy. In practice, the legal principle is sometimes derived from this institution-related protection that the protective purposes of BT8 MaComp and the other legal requirements for institutions (and here above all the IVV) can coexist and therefore the provisions of BT8 MaComp for the remuneration systems of the relevant persons apply in addition to the legal requirements of the institutions. From a standardised perspective, the client-related protective purpose is also regularly taken into account in the business and risk strategy of the institution and is covered by the regulatory legal requirements via the central requirement of Section 4 IVV (= mandatory compatibility of the remuneration strategy with the business and risk strategy) and, for individual client groups of the WPDU, also via Section 5 (1) Nos. 3 to 5 IVV. The IVV also defines an extensive regulatory definition of employees in its personal scope of application, which includes not only employees in an employment relationship but also all external employees who fulfil the requirements of Section 2 (7) IVV. All employees who are also subject to the requirements of BT8 MaComp are therefore covered by the regulatory legal requirements.
  
  
  Against this background, there are material reasons in favour of aligning the provisions of BT8 MaComp and the associated subsidiarity principle holistically with the regulatory legal requirements; i.e. the systematic evaluations and motivations of the legislator for the specific design of the legal framework, especially the IVV, must also be taken into account when assessing its application. When applying BT8 MaComp to WPDUs, which are also institutions in accordance with Section 1 (1) sentence 1 IVV, it must therefore be taken into account that the legislator has set out general requirements in the second Section of the IVV on remuneration systems and remuneration governance and, via Section 1 (3) IVV (as a result of the principle of proportionality under supervisory law) that the specific requirements of the third Section (including the mandatory appropriate consideration of performance parameters at the levels of the institution/group, the organisational unit and the individual performance contributions and the fixing of individual performance contributions in target agreements with the use of qualitative and quantitative criteria in accordance with Section 19 (1) and 2 IVV, the partial granting of variable remuneration in deferrals and the implementation of a clawback and malus system in accordance with Sections 18 and 20 IVV) should only be applicable to employees of significant institutions and qualified non-significant institutions identified as risk takers. This means, for example, that the sufficient consideration of qualitative criteria for the variable remuneration of relevant persons not subject to the requirements of Sections 18 et seq. IVV, does not necessarily have to take place by means of agreed targets as performance parameters, but can continue to take place by means of a relevant design of the catalogue of negative performance contributions in accordance with Section 5 (2) IVV.
• For WPDUs that also qualify as capital management companies (KVG) within the meaning of the German Capital Investment Code (KAGB) and whose remuneration systems are subject to the requirements of Annex II of Directive 2011/61/EU as an AIF-KVG and/or the requirements of Articles 14a and 14b of Directive 2009/65/EC (as amended by Directive 2014/91/EU) as a UCITS capital management company in accordance with Section 37 (1) and (2) KAGB: For this group of companies, it must be taken into account that the aforementioned statutory provisions (1) only apply in each case to the relevant persons identified as risk takers and therefore the subsidiarity principle has no practical relevance for the remuneration systems of the other relevant persons of the WPDU, and (2) with regard to the risk takers, the core purpose is to incentivise the individual risk taker to behave in a monetary manner in line with the sustainable business and risk strategy of the KVG. According to these legal principles, BT8 MaComp is to be aligned holistically with the legal requirements for the relevant persons identified as risk takers and is applicable to the remuneration systems of the other relevant persons of the WPDU without restriction by relevant legal requirements.
• For WPDUs that also qualify as investment firms within the meaning of Section 1 (1) of the German Securities Institutions Act (WpIG), a distinction must be made (see also our Client Alert):
  
  For large investment firms within the meaning of Art. 1 (2) of EU Regulation 2019/2033 (IFR), Section 2 (18) WpIG, the aforementioned differentiation applies equally to institutions, as their remuneration systems are also subject to the legal requirements of the IVV, among others.
  
  For medium-sized investment firms within the meaning of Art. 2 (17) WpIG, whose remuneration systems are subject to the legal requirements of Section 46 WpIG and the German Securities Institutions Remuneration Ordinance (Wertpapier-Institutsvergütungsverordnung, WVV), the aforementioned distinction for capital management companies applies equally, as the WVV is only applicable to the relevant persons identified as risk takers and, with regard to the risk takers, essentially aims to incentivise the individual risk takers to behave in accordance with the sustainable business and risk strategy of the medium-sized securities institution.
  
  In contrast, the remuneration systems of small securities institutions within the meaning of Art. 12 (1) IFR, Section 2 (16) WpIG are not subject to any further-reaching legal requirements, meaning that the subsidiarity principle has no practical relevance for their remuneration systems.

3. Remuneration components covered by BT8 MaComp

BaFin has left the definition of remuneration largely unchanged from the previous version in accordance with the provisions of BT 8.1.3 to 8.1.5 MaComp. BT8 MaComp generally covers all remuneration components that the relevant person receives from the WPDU or a third party in relation to their activities in the provision of investment services. In accordance with BT 8.1.5 MaComp, remuneration components granted on the basis of a collective agreement are not covered by BT8 MaComp. BT 8.1.4 MaComp remains unchanged in terms of content and stipulates that, among other things, company pension benefits and all remuneration components granted on the basis of a statutory regulation or as statutory contributions are also not subject to BT8 MaComp.

4. Content-related regulations on remuneration systems: The regulatory principle of proportionality

In the new version, BT8 MaComp also distinguishes between regulations that must be observed by the WPDU for the relevant persons - taking into account the subsidiarity principle - and regulations whose application the WPDU must review and assess on the basis of the supervisory proportionality principle and document the result of the assessment. 

BaFin has characterised the distinction between these two sets of regulations - following the ESMA announcement in the ESMA guidelines: Regulations with the terms "shall", "must", "has to" or "obliged to" include mandatory regulations that essentially further specify the mandatory legal requirements. Regulations with the term "should" include the regulations subject to the regulatory proportionality principle.

The mandatory regulations essentially include the following requirements:

• Sufficient consideration and definition of qualitative criteria for remuneration (BT 8.2.1.2 and 8.2.1.3, 8.2.1.9): While the previous version only related this criterion to the performance parameters of variable remuneration, BT8 MaComp 2024 stipulates the application of this regulation to all remuneration components subject to BT8 MaComp. In practice, the scope of application of the regulation is likely to continue to essentially relate to variable remuneration - and this requirement is intended to ensure that consideration of the client's interests constitutes a material performance parameter and, in this respect, that variable remuneration is not only determined on the basis of quantitative parameters which, from a standardised perspective, are based on performance indicators of the WPDU (e.g. EBIT, contribution margin indicators related to the securities services business) and are not primarily geared towards the client's interests.
  
  BT8 MaComp - unchanged - does not contain any further requirements for the specific implementation of this regulation. WPDUs can therefore continue to take these into account in the remuneration system for variable remuneration at the level of the performance parameters (in the case of a target agreement system as qualitative targets and in the case of unilateral targets or a discretionary system as criteria/measurement parameters specified by the WPDU) and/or at the level of the review of any negative performance contributions.
• Mandatory consideration of client interests in the remuneration strategy (and thus for the remuneration system) of the relevant persons (BT 8.2.1.1): To operationalise this legal principle, BaFin has clarified in BT8 MaComp 2024 that the WPDU must ensure through appropriate criteria that the interests of the relevant persons and the WPDU are aligned with the client interests. In practice, this can be achieved primarily by defining the appropriate qualitative criteria in the remuneration system in accordance with the above explanations.
  
  This regulation has no further practical relevance for the WPDU subject to the IVV, as its regulatory content is specified in Sections 4 and 5 IVV. All other WPDUs must comply with this requirement for the remuneration systems of the relevant persons listed under point 2.
• Establishing appropriate and transparent remuneration principles and remuneration procedures and informing the relevant persons in advance about the relevant parameters for determining the amount of remuneration (BT 8.2.1.1, 8.2.1.4 to 8.2.1.6): This requirement has two purposes. On the one hand, the obligation to establish remuneration principles and remuneration procedures is intended to ensure that WPDUs sufficiently verify and reflect the material risks of the remuneration systems of the relevant persons, in particular with regard to client interests, and adjust them in the remuneration system using suitable remuneration parameters and also take into account risks resulting from the introduction of new products or services over time in the remuneration system at all times. The requirement also aims to ensure a transparent remuneration system, particularly for the relevant persons, and its documentation, guaranteeing that the relevant persons are informed of the relevant remuneration parameters at the beginning of the reference year and can therefore organise their professional activities accordingly. This regulation has no further practical relevance for the WPDUs subject to the IVV, as the content of the regulation is also specified in Sections 11 (1) and 13 IVV. All other WPDUs must comply with this requirement for the remuneration systems of the relevant persons listed under point 2.
• Appropriate ratio between the fixed remuneration components and the variable remuneration components in accordance with the criteria of Section 25a (5) KWG (BT 8.2.2.1): The content of this provision was already contained in BT 8.3.1 of the predecessor regulation. It is relevant in terms of content for the remuneration systems of WPDUs that qualify as KVGs or medium-sized securities institutions and for which the other statutory provisions do not have an absolute upper limit for variable remuneration comparable to the provisions of Section 25a (5) KWG of a maximum of 100% or 200% based on a corresponding resolution of the shareholders, and which have to implement the upper limit for the relevant remuneration of the relevant persons. 
• Special requirements for the remuneration systems of the control functions of risk management and internal audit - no impairment of objectivity and independence (BT 8.2.4.1 and 8.2.4.3): This mandatory provision, included for the first time, extends the personal scope of application of BT8 MaComp within the substantive framework of BT 8.2.4 to employees working in the above-mentioned control functions and aims to ensure that they must perform their control functions - with a view to client interests - without being impaired by the specific structure of the remuneration parameters. This regulation has no further practical relevance for the WPDU subject to the IVV, as the content of the regulation is also specified in Section 5 (4) IVV. All other WPDUs must comply with this requirement for the remuneration systems of the relevant persons listed under point 2.
  
  The regulations subject to the regulatory proportionality principle essentially comprise the following requirements, whereby the WPDU must base its assessment on whether the application of the specific regulation is appropriate to safeguard client interests - taking into account the specific function of the relevant person, the relevant products and other services, as well as the other instruments contained in the risk management and remuneration system to ensure that client interests are adequately taken into account: 

• Performance assessment of the relevant persons based on qualitative criteria and definition of assessment parameters in the remuneration principles (BT 8.2.1.1, 8.2.1.3 and 8.2.1.7): This provision is linked to the mandatory consideration of qualitative criteria in the remuneration system and, as a result, determines the WPDU to review and assess the consideration of qualitative criteria as performance parameters with specific assessment parameters. For this assessment, WPDUs whose remuneration systems are also subject to the IVV can refer to the subsidiarity guideline in accordance with the explanations in Section 2. All other WPDUs must carry out this assessment for the remuneration systems of the relevant persons listed in Section 2 in accordance with the aforementioned criteria.
• Consideration of the relevant factors of remuneration (in particular the specific role of the relevant person, type of product, cross-selling line and distribution methods) for all remuneration parameters, including to avoid conflicts of interest (BT 8.2.1.7 and 8.2.1.8): BaFin clarifies in BT 8.2.1.8 that the quantitative criteria for variable remuneration should also not conflict with client interests. 
• Application of BT8 MaComp also to criteria for assessing salary increases and promotions (BT 8.2.1.10): This extension - whose provision with the same content in the ESMA guidelines was largely rejected by the remuneration practice in the consultation procedure there - is intended to ensure that the criteria for the career development of relevant persons also take sufficient account of client interests and in this respect, in particular, relevant persons do not take client interests into account in the performance of their activities in the required manner for opportunistic career reasons. This regulation has no counterpart in the other legal requirements for the remuneration systems of the WPDU, so that all WPDUs must carry out a corresponding review and assessment to implement this regulation in the remuneration principles of their relevant persons.
• Variable remuneration based on a linear calculation or multiple performance targets at different levels (BT 8.2.2.3).
• Granting a portion of variable remuneration over a deferral period with subsequent adjustment criteria and clawback clauses (deferral with malus and clawback, BT 8.2.3.1 to 8.2.3.1.4). These provisions, which were included in MaComp 2024 for the first time in BT8 MaComp, are based on the consideration that, in individual cases, a subsequent (ex-post) risk adjustment of the variable remuneration and its valuation parameters may also be useful for the adequate consideration of customer interests; for example, if relevant risks from the relevant products/services and the specific remuneration parameters at the WPDU only materialise after a period of several years. If the assessment of the WPDU includes the requirement to implement these regulations as a result, the WPDU must observe the restrictive requirements for transparency and effectiveness in terms of content when implementing the clawback regulations in particular in the remuneration system - and can draw on the experience gained by (qualified non-)significant institutions in implementing the clawback requirements of Sections 18 (5), 20 (6) IVV. For this assessment, WPDUs whose remuneration systems are also subject to the IVV can refer to the subsidiarity principle in accordance with the explanations in Section 2, according to which the IVV only determines the aforementioned regulations for the variable remuneration of risk takers in (qualified non-)significant institutions in accordance with Section 1 (3) IVV. All other WPDUs must carry out this assessment for the remuneration systems of the relevant persons listed under point 2. in accordance with the aforementioned criteria.
  
  The content requirements for the remuneration systems conclude in BT 8.2. 5 with good and bad examples, which also follow the three-part methodology in BT8 MaComp2024 with examples that are to be regarded as (1) best practice (whereby the substantive examples were already included in the previous version of BT8 MaComp), (2) generally inadmissible practices, for which the WPDU can demonstrate the permissibility in individual cases (whereby BaFin has further specified individual examples compared to the previous version and in some cases also emphasised them more strongly), and (3) as always impermissible procedures (with examples unchanged compared to the previous version of BT8 MaComp).
  
   

5. Regulations on remuneration governance

The catalogue on remuneration governance now contained in BT 8.3 continues to define the responsibility of the compliance function for monitoring the establishment, design and implementation of remuneration systems in accordance with BT8 MaComp (BT 8.3.1) as a mandatory provision.

In BT8 MaComp 2024, BaFin has expanded the catalogue of regulations subject to the proportionality principle in BT 8.3.2 to 8.3.5 and BT 8.4, according to which, among other things, WPDUs should subject the remuneration principles to a review for BT8 MaComp compatibility in addition to the regular review and, if necessary, promptly adjust them in the event of relevant and material changes to business activities (BT 8.4.2), whereby other control functions in addition to compliance can also be included in the review if necessary (BT 8.4.5).

6. Application of BT8 MaComp 2024 and implementation by the WPDU

BT8 MaComp 2024 has been applicable since 28 February 2024 and must therefore be implemented by the WPDUs in the current financial year. Among other things, the implementation must include comprehensive documentation of the results of the assessment of the application of the regulations subject to the proportionality guideline to the remuneration systems of the relevant persons. We are advising and monitoring the implementation of the regulatory requirements in the remuneration systems of the relevant persons at WPDUs and will discuss individual challenges and design options for implementation in our follow-up Client Alerts.