Group-wide regulation of remuneration systems
Modifications of the remuneration rules in the group context by IVV 4.0 and EBA Guidelines on Sound Remuneration Policies 2.0
The revised version of the Remuneration Ordinance for Institutions (Institutsvergütungsverordnung, IVV 4.0) and the revised EBA Guidelines on Sound Remuneration Policies (EBA/GL/2021/04, GSR 2.0), which came into force on 31 December 2021, include a modification of the requirements for the group-wide regulation of remuneration systems, which affected institutions must take as an opportunity to update their group-wide remuneration strategy. In this Client Alert, we discuss the revised regulatory requirements and initial practical experience with their implementation.
- 1. The regulatory scope of consolidation as a starting point
- 2. Definition and requirements of the group-wide remuneration strategy
- 3. Concrete design of the group-wide remuneration strategy
- 4. Monitoring compliance with the group-wide remuneration strategy
- 5. Summary and outlook
The modifications in Sec. 27 IVV result from the updated requirements of Art. 3 (1) no. 63, 109 (2) of Directive 2019/878/EU (CRD V). When updating the group-wide remuneration strategy, the superordinate company must observe the guiding principles now explicitly determined in Sec. 27 (1) sentences 1 and 2 IVV, according to which the strategy must include principles for appropriate, transparent, gender-neutral remuneration systems geared towards the sustainable development of the group and (generally) implement the requirements of Sec. 25a (5) KWG and Sec. 4 to 13 IVV with regard to all employees of the group companies. In addition, the legislator clarifies in Sec. 27 (2) IVV for the group-wide remuneration strategy of significant institutions and qualified non-significant institutions (see already our Client Alert on the new regulations for the remuneration systems of the qualified non-significant institutions), that the remuneration systems for employees from the individual group companies identified as Group Material Risk Takers must also comply with the requirements of Sec. 25a (5) of the German Banking Act (Kreditwesengesetz, KWG) as well as the requirements of Sec. 18 et seq. IVV (to the extent specified in Sec. 27 (2) sentences 2 and 3 IVV). The regulation on the inclusion of the remuneration systems of employees from group companies, which have to observe independent EU legal requirements (and domestic requirements implementing these) for the remuneration systems, is systematically modified in Sec. 27 IVV. In addition to capital management companies under the German Capital Investment Code (Kapitalanlagegesetzbuch, KAGB), this also applies in particular to medium-sized and small investment firms under the German Investment Firms Act (Wertpapierinstitutsgesetz, WpIG). In such cases, Sec 27 (1) sentence 2 IVV (concerning requirements of Sec. 25a (5) KWG and Sec. 4 to 13 IVV) as well as Sec. 27 (2) IVV (concerning group risk takers) are not to be implemented (Sec. 27 (3) IVV). An exception exists for employees of the individual capital management company or the individual investment firm who (at the same time) qualify as risk takers of the institution because they exercise a direct significant influence over at least one CRR institution in the group (Sec. 27 (4) IVV). Sec. 27 (5) IVV, which requires the superordinate company to ensure compliance with the group-wide remuneration strategy and contains further regulations in the relationship between the superordinate and the subordinate companies and has remained without any substantive changes.
The GSR 2.0 published prior to the IVV 4.0 had already previously announced the European Banking Authority's (EBA) expanded understanding of the group concept - as a result of the updated requirements in the CRD V - according to which a group-wide remuneration strategy must be established and applied to all group companies in the (sub-) scope of consolidation if at least one group company is an institution (paragraphs 8ff. and 75ff. GSR 2.0). The EBA clarifies in paragraph 79 of the GSR 2.0 that the national remuneration rules applicable to the registered office of the group entity must take precedence over the rules of the group-wide remuneration policy.
1. The regulatory scope of consolidation as a starting point
In practice, the implementation and execution of the group-wide regulation of remuneration (remuneration strategy) in conformity with the supervisory authority initially requires the verification of the scope of application of Sec. 27 IVV in conformity with the rules and at the same time in line with requirements. Sec. 27 IVV focuses on the group and contains regulations for superordinate and subordinate companies. The concept of a group is determined in accordance with Sec. 2 (12) IVV in conjunction with Sec. 10a (1) and (2) KWG.
Pursuant to Sec. 10a (1) sentence 1 KWG, superordinate companies are CRR credit institutions that are required to consolidate pursuant to Art. 11 of Regulation (EU) 2019/876 (CRR II) and (other credit) institutions that are required to consolidate pursuant to Sec. 1a KWG in conjunction with Art. 11 CRR II. Sec. 1 KWG expands the group of credit institutions covered by the KWG compared to CRR II; Sec. 1a KWG serves to (also) extend the regulations of the CRR to all credit institutions according to Sec. 1 KWG. According to the national regulations, this implies that more companies fall under consolidated supervision than provided for in the CRR. Sec. 10a (2) KWG contains regulations for superordinate companies of (mixed) financial holding companies.
Subordinated companies include all companies that are to be consolidated in accordance with Art. 18 CRR II or are voluntarily consolidated by the superordinated company (Sec. 10a (1) sentence 1 KWG). Pursuant to Art. 18 (1) CRR II, the scope of consolidation comprises institutions (Art. 4 (1) nos. 1 to 3 CRR II) and financial institutions (Art. 4 (1) no. 26 CRR II; including asset management companies) which are subsidiaries of an institution, a financial holding company or a mixed financial holding company. The term “subsidiaries” refers to a parent company’s subsidiaries, as well as its subsidiaries and second-tier subsidiaries (Art. 4 (1) no. 16 sentence 2 CRR II). Providers of ancillary services (Art. 4 (1) nos. 1 to 3 CRR II) are also included in the consolidation in accordance with Art. 18 (2) CRR II in the cases and according to the methods specified in Art. 18 CRR II. In addition, the powers of the competent authorities under Art. 18 (4) and (6) CRR II to determine whether and in what form consolidation is to be carried out, as well as the basic possibility of voluntary consolidation, are to be considered. Under Art. 18 (4) CRR II, companies to be consolidated proportionally are only to be taken into account for the group-wide remuneration strategy if they are under the joint management of the parent company and the other shareholders. Companies that are exempt from the regulatory scope of consolidation pursuant to Art. 19 CRR II are not to be considered for the group-wide remuneration strategy.
2. Definition and requirements of the group-wide remuneration strategy
The superordinate company must define the group-wide remuneration strategy for all employees within the supervisory scope of consolidation (Sec. 27 (1) sentence 1 IVV). In principle, the strategy must take into account the requirements of Sec. 4 to 13 IVV and Sec. 25a (5) KWG on a group-wide basis. While the group-wide remuneration strategy applies comprehensively (see also BaFin announcement in BaFin Journal October 2021), these (concrete) requirements do not have to be implemented for all subordinate companies within the framework of the group-wide remuneration strategy. Pursuant to Sec. 27 (1) sentence 2 IVV, the exemption provisions in Sec. 2 KWG (above all) regarding the applicability of Sec. 25a (5) KWG (bonus cap) and in Sec. 1 IVV regarding the applicability of the IVV can be applied accordingly, whereby the provisions of Sec. 27 (2) and (4) IVV must also be observed here. This means that, for example, companies that exclusively provide factoring and finance leasing services are not subject to the regulatory regime of the IVV "via the supervisory back door" (after all) within the framework of the group-wide remuneration strategy. Furthermore, subordinate companies that are bound by special remuneration requirements in accordance with other (EU) legal bases (e.g. capital management companies) do not have to comply with the remuneration requirements of the KWG and the IVV (subject to the exception in Sec. 27 (4) IVV) as specified in Sec. 27 (1) sentence 2 and (2) IVV (Sec. 27 (3) IVV).
From a geographical perspective, the group-wide remuneration strategy generally covers all group companies. It should (also) include a minimum standard for the group companies abroad. If a subordinate company with its registered office abroad is subject to stricter requirements under the local legal system than in Germany, the superordinate company must take this into account when determining the group-wide remuneration strategy and work towards ensuring that the subordinate company complies with the stricter requirements (Sec. 27 (1) sentence 4 IVV).
3. Concrete design of the group-wide remuneration strategy
The legislator does not determine any specific requirements for the content-related design of the group-wide remuneration strategy in Sec. 27 IVV with regard to the determination of a group-wide uniform remuneration system (central remuneration strategy), the determination of individual remuneration systems for the individual group companies (decentralised remuneration strategy), or a combined approach (e.g. in such a way that the group-wide remuneration strategy contains guiding principles which the individual group company can modify in individual cases). In practice, all three approaches have become established. The concrete design can be determined, among other things, on the basis of the criteria of the geographical scope of the business activity (if there are only subordinate companies based in Germany, this speaks more for a centralised remuneration strategy) or the administration of the remuneration systems (if the administration is carried out by the human resources department of the individual group company, this speaks more for a decentralised remuneration strategy); it must be carried out on the basis of a holistic approach.
4. Monitoring compliance with the group-wide remuneration strategy
The superordinate company must ensure compliance with the group-wide remuneration strategy in the subordinate companies (Sec. 27 (5) sentence 1 IVV). For the corresponding regulation in the IVV 3.0, BaFin has announced in the interpretation guidance for Sec. 27 IVV 3.0 that the superordinate company must work towards compliance with the group-wide remuneration strategy within the scope of application defined in accordance with Sec. 27 IVV and, if necessary, towards the establishment of a remuneration control committee.
The relevant monitoring activities and the associated process steps for the purpose of compliance within the meaning of Sec. 27 (5) sentence 1 IVV can be determined and carried out by the superordinate company on the basis of a risk-oriented approach. In practice, a graduated approach has been established as a design option, according to which, on the first level, the subordinate company reports annually to the superordinate company on the implementation and practical execution of the group-wide remuneration system for the respective reporting year, the superordinate company evaluates the information provided by the subordinate companies on the second level and assesses the compliance with the group-wide remuneration strategy, and, if necessary/as the occasion arises, performs further audit procedures on a third level to verify the information provided by the subordinate company. In addition, a regular exchange process between the parent company and the subordinate companies for the implementation of the group-wide remuneration strategy has proven its worth in practice.
5. Summary and outlook
Superordinate companies must implement the revised requirements of Sec. 27 IVV in their group-wide remuneration strategy. In the next audit campaign, the revised requirements of Sec. 27 IVV will form the audit benchmark for the appropriateness of the remuneration system, inter alia, with regard to compliance with the remuneration requirements within the group (Sec. 12 (3) sentence 2 no. 4 of German Auditing Ordinance (Prüfberichtsverordnung, PrüfbV)).