Institutsvergütungsverordnung 4.0

The IVV 4.0 is the provisional conclusion of the overall statutory package on the revised regulatory requirements for the remuneration systems of institutions (the finalisation of the IVV 4.1 (draft published in November 2020) with the addition of the regulatory requirement for the buffer of the leverage ratio pursuant to Sec. 10j of the German Banking Act (Kreditwesengesetz, KWG) to the ancillary conditions of Sec. 7 (1) s. 3 IVV for the determination of the total amount of variable remuneration will only affect globally systemically relevant institutions).

The update of the statutory framework was initiated by the EU legislator with the revision of Directive 2013/36/EU (CRD IV) by Directive 2019/878/EU (CRD V, see our Client Alert) and the revision of Regulation 575/2013 (CRR) by Regulation 2019/876 (CRR II).

The European Commission has supplemented the revised CRD V requirements on the identification of employees who have a material influence on the institution's risk profile (Risk Takers) with Delegated Regulation 2021/923 (RTS-MRT 2.0) published in the EU Official Journal on 9 June 2021 (see our Client Alert). Prior to this, the German legislator had revised the relevant domestic regulations on Risk Taker identification with the German Risk Reduction Act (Risikoreduzierungsgesetz) with Sec. 1 (21) s. 2 and 25a (5b) KWG that came into force on 29 December 2020.

The EBA has supplemented the CRD V requirements on the content of remuneration systems with the revised version of the Guidelines on Sound Remuneration Policies (GSR 2.0) published on 2 July 2021 (see our Client Alert).
BaFin published a first draft of IVV 4.0 in November 2020 (link). The final version of the IVV 4.0 takes into account a large number of the proposed changes submitted by practitioners in the consultation process. The IVV 4.0 will be supplemented by an interpretation guidance (Auslegungshilfe) of BaFin for the IVV 4.0, for which BaFin has already announced a consultation procedure and whose final version is expected to be published (only) in 2022.

1. Reloaded scope of application: IVV “out of service” for factoring and finance leasing companies on solo level - also exemption on group level

The IVV 4.0 starts with a legal relief for companies that exclusively provide factoring and finance leasing services: In future, these companies will no longer be covered by the IVV (Sec. 1 (1) s. 2 IVV). For the design of their remuneration systems, these companies must only take into account the requirements of Sec. 25a (1) KWG, according to which the remuneration systems of their employees must (continue to) be appropriate, transparent and geared to the sustainable development of the institution (Sec. 25a (1) s. 3 no. 6 KWG), while according to Sec. 2 (7a) KWG they (also) do not have to comply with the general supervisory requirements of Sec. 25a (5) KWG. Pursuant to Sec.27 (1) s. 2 IVV, the sectoral exemption should also apply to the (non-)inclusion of these companies within a group within the meaning of Sec. 2 (12) IVV in a group-wide remuneration strategy. The legislator has not adopted the proposal announced in the consultation procedure to exclude guarantee banks from the scope of application of the IVV; their remuneration systems will therefore continue to be assessed in accordance with the general requirements for non-CRR institutions (by observing the privileges for guarantee banks according to Sec. 2 (9i) KWG).

2. Extended scope of application: The group of qualified non-significant institutions within the meaning of Sec. 1 (3) s. 2 IVV

For the group of qualified non-significant institutions who are confronted with the requirements of Sec. 18 et seq. IVV for the first time pursuant to Sec.1 (3) s. 2 no. 2 IVV, the legislator has clarified in the final version of the IVV 4.0 that the trading book activities and the derivative positions must have the relevant scope as of the end of the last financial year.

At the same time, the IVV 4.0 - in implementation of the requirements of Art. 94 (3) CRD V - expands the scope of application of the special requirements for the remuneration systems of Risk Takers (Sec. 18 et seq. IVV). In future, these will not only have to be observed by significant institutions (Sec.1 (3c) KWG), but - with the exception of the provisions on the multi-year assessment period and the increased proportion of variable remuneration to be withheld in the meaning of Sec. 19 (1) s. 3 and 4, 20 IVV) and on the Remuneration Officer (Sec. 23 to 26 IVV) - are also to be applied by non-significant institutions which can be assigned to one of the two case groups of Sec. 1 (3) s. 2 IVV (so-called qualified non-significant institutions). The first group (Sec.1 (3) s. 2 no. 1 IVV) covers superordinate institutions of a group with a (partially) consolidated balance sheet total of more than EUR 30 billion. The scope of application of this case group therefore also includes superordinate institutions that have a balance sheet total of less than EUR 15 billion at solo level and exceed the balance sheet total of EUR 30 billion in their (sub-) consolidated group. The second group covers institutions whose balance sheet total exceeded EUR 5 billion on average on the respective reporting dates of the last four completed financial years and which belong to one of the sub-case groups of Sec. 1 (3) s. 2 no. 2 IVV, i.e. (1) cannot claim the exemption of Sec. 20 (1) of the German Act on the Recovery and Liquidation of Institutions and. Financial Groups (Sanierungs- und Abwicklungsgesetz, SAG) or the simplified requirements of Sec. 19 and 41 SAG, or (2) at the end of the last financial year, have trading book activities of at least 5% of the total assets of the institution and amount to at least EUR 50 million, or (3) have derivative positions held for trading purposes with a total value of more than 2% of the on-balance sheet and off-balance sheet assets and an absolute total value of all derivative positions of more than 5%.

It should be noted that the qualified non-significant institutions have to identify their Risk Takers solely in accordance with the catalogue of Sec. 25 (5b) s. 1 KWG. The extended requirements of Sec. 25 (5b) s. 2 KWG apply exclusively to significant institutions; this has also been clarified by the legislator for qualified non-significant institutions with group issues in Sec. 27 (2) s. 3 IVV for the group-wide Risk Taker identification.

3. Extending the general requirements for the appropriateness of remuneration systems: gender-neutral remuneration policy

Sec. 5 (1) no. 6 IVV 4.0 supplements - in implementation of Art. 74 (1), 92 (2) CRD V - the catalogue of general guiding principles of Sec. 5 (1) IVV on the appropriateness of remuneration systems with the maxim of a gender-neutral remuneration policy. In the final version of the IVV 4.0, the legislator has included the proposal from the consultation - based on the EU requirements in Art. 3 (1) No. 65 CRD V - that the requirement of equal pay should apply to all equal activities or activities of equal value. In terms of content, the regulation - which is not necessarily to be subsumed under the basic purposes of the IVV underlying regulatory appropriateness (monetary incentive of the individual employee to behave in accordance with the business and risk strategy of the institution as well as transparent risk management of the institution) - does not bring any innovations for the remuneration systems: Institutions are already obliged to have a gender-neutral remuneration policy under current law (in particular under Sec. 1 of the German Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz) and under the German Remuneration Transparency Act (Entgelttransparenzgesetz)).

For institutions, the guiding principle of gender-neutral remuneration policy includes, in addition to the content perspective, two implementation dimensions from remuneration governance: (1) From a formal perspective, institutions shall demonstrate that the remuneration policy is gender-neutral; to this end, institutions shall establish suitable processes and appropriate documentation. (2) Institutions shall establish suitable instruments for effective monitoring of compliance with the gender-neutral remuneration policy; in addition to suitable control processes in relation to the concrete remuneration decision (e.g. dual control principle; in the case of significant institutions, the remuneration officer could take over the control), this includes consideration in the appropriateness test pursuant to Sec. 12 IVV. From the perspective of remuneration governance, the IVV 4.0 does not contain any more detailed requirements for these two implementation dimensions; more detailed pronouncements on this will probably be contained in the BaFin's interpretative guide to the IVV 4.0. It remains to be seen to what extent BaFin will follow the EBA's pronouncements in GSR 2.0 (see our Client Alert). In view of the comparability of the supervisory guiding principle of a gender-neutral remuneration policy, it seems obvious to take into account the verification and monitoring processes already implemented by the institutions for the implementation of the German Remuneration Transparency Act in the concrete design of the remuneration governance.

4. Modification of the special requirements for the variable remuneration of Risk Takers

The changes in the special provisions of the IVV regarding the variable remuneration of Risk Takers follow the requirements of CRD V: (1) The retention period for the variable remuneration of Risk Takers will in future amount to at least four years (Sec. 20 (1) s. 1 IVV). (2) The exclusion of Risk Takers with a variable remuneration of no more than EUR 50,000 in the reference period from the scope of application of Sec. 20 et seq. IVV will in future also require that the variable remuneration does not exceed 1/3 of the total remuneration (Sec. 18 (1) s. 3 IVV). The legislator has also clarified in Sec. 20 (2) IVV that the minimum five-year retention period is (only) limited to Risk Takers who belong to the management level immediately downstream of the management.

In addition, it is clarified in the case groups of Sec. 18 (5) s. 3 IVV, each of which is intended to justify a complete loss of variable remuneration, that the case group of Sec. 18 (5) s. 3 no. 1 IVV, which according to the wording previously only dealt with conduct by the Risk Taker that led to a significant loss for the institution or to a significant regulatory sanction, is also intended to include conduct that leads to a significant supervisory measure. The clarification does not involve any substantive innovation, as the supervisory authority already included such material supervisory measures (e.g. ordering an increase in capital requirements of at least 0.5 percentage points within the meaning of Sec. 10 KWG) in the scope of application of Sec. 18 (5) s. 3 no. 1 IVV under the IVV 3.0.

5. Modification of the requirements to group matters (Sec. 27 IVV)

The modifications in Sec. 27 IVV result from the new requirements of Art. 3 (1) no. 63, 109 (2) CRD V. The superordinate company must continue to define a group-wide remuneration strategy, whereby Sec. 27 (1) s. 1 IVV now explicitly stipulates that this strategy must contain principles for appropriate, transparent, gender-neutral remuneration systems geared to the sustainable development of the group, which must implement the requirements of Sec. 25a (5) KWG and Sec. 4 to 13 IVV with respect to all employees of the group companies. In addition, the legislator clarifies in Sec. 27 (2) IVV for the group-wide remuneration strategy of the significant institutions and the qualified non-significant institutions that the remuneration systems for the employees from the individual group companies identified as group Risk Takers must, in addition to Sec. 18 et seq. IVV (to the extent specified in Sec. 27 (2) s. 2 IVV), also comply with the requirements of Sec. 25a (5) KWG.

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 KAGB, this also applies to investment firms under the German Investment Firms Act (Wertpapierinstitutsgesetz). These are excluded from the group-wide remuneration strategy (Sec. 27 (3) IVV) with the exception of the employees of the individual capital management company or investment firm who are to be qualified as Risk Takers of the institution because they exercise a direct material influence on at least one CRR institution in the group (Sec. 27 (4) IVV).

6. (Editorial) Modification of the statutory regulations on the catalogue of duties of the Remuneration Officer

In IVV 4.0, the legislator has editorially clarified the Remuneration Officer's catalogue of duties, according to which the ongoing monitoring of the appropriateness of the remuneration systems should specifically relate to the regulatory requirements of the IVV (including the group-wide remuneration strategy in accordance with Sec. 27 IVV, Sec. 25a (1) s. 3 no. 6, (5) KWG, the identification of Risk Takers in accordance with Sec. 25a (5b) KWG and disclosure in accordance with Sec. 16 IVV and Art. 450 CRR). The clarification is in line with the practice already followed by the Remuneration Officers.

7. Further material provisions from IVV 4.0

Other material provisions of IVV 4.0 include:

• The HR department is no longer defined as a control unit within the meaning of Sec. 2 (11) IVV. The German legislator is thus implementing the EU legal understanding of the control unit that the EBA had already announced in its Guidelines on Internal Governance (GL/2017/11). To this end, institutions must revise the relevant processes in the design and implementation of the remuneration systems with regard to the - unchanged required - involvement of the HR department (Sec. 3 (3), 11 (1) nos. 2 and 3 IVV). In addition, Sec. 9 IVV is no longer applicable to the remuneration systems of the employees from the HR department.
• Sec. 5 (6) s. 5 no. 1 lit. c) IVV is extended to clarify that social plans concluded with the staff council in accordance with the relevant legal bases under staff representation law can also serve as a legal basis for privileged severance pay.
• The disclosure requirements for non-significant institutions pursuant to Sec. 16 (2) IVV are modified. Listed (i.e. listed on a regulated market) small and non-complex institutions within the meaning of Art. 4 (1) no. 145 CRR II must disclose on the remuneration system - in addition to the information from Art. 450 (1) lit. a) to d), h) to j) CRR II - the total amount of all remuneration (divided into fixed and variable remuneration) as well as the number of beneficiaries of the variable remuneration (Sec. 16 (2) IVV). All other small and non-complex institutions within the meaning of Art. 4 (1) no. 145 CRR II (in particular, institutions with total assets of EUR 5 billion or less that also meet the other requirements of Art. 4 (1) no. 145 CRR II) are not subject to any disclosure requirements under Sec. 16 IVV and Art. 450 CRR II (Art. 433b (2) CRR II) with regard to their remuneration systems. The legislator had already clarified this in the explanatory memorandum in the draft bill of the IVV 4.0.
  

8. Implementation of IVV 4.0 in the remuneration systems: No statutory transitional regulation and at the same time de facto transitional period

The IVV 4.0 came into force on 25 September 2021. In the final version of the IVV 4.0, the legislator did not take into account the proposal announced in the consultation process to define a transitional period of at least six months to enable the implementation of the revised requirements in the remuneration systems.

For the specific timely implementation, it must be taken into account that institutions - in view of the experience gained from the legislative procedures for the previous revisions of the IVV, which in the respective final versions of IVV 2.0 and IVV 3.0 in part included material modifications of the respective draft versions - were initially allowed to wait for the final version of IVV 4.0 for the final analysis of the need for changes in their remuneration systems. In addition, in order to effectively implement the revised regulatory requirements in the remuneration systems, the framework conditions under labour law applicable to the institution must be observed, which in the case of elected works council/staff council includes observance of the relevant co-determination rights. The framework conditions under labour and supervisory law and the resulting time dimensions for concrete implementation must also be taken into account, among other things, in relevant audits (in particular the audit of the financial statements in accordance with Sec. 12 of the German Audit Ordinance (Prüfberichtsverordnung, PrüfbV) and the appropriateness audit in accordance with Sec. 12 IVV).

9. Outlook: After the IVV 4.0, …

... among other things, a (further) development of the remuneration systems to further consider the (ESG) sustainability risks is to be undertaken

The further legal development of the regulatory framework for remuneration systems under IVV 4.1 and following the publication of BaFin's interpretative guidance on IVV 4.0 remains to be seen.

In fact, institutions will probably have to continue to deal with a further development of the remuneration strategy and the remuneration systems for the further implementation of the (ESG) sustainability criteria. (At the latest) The possible consideration of sustainability risks in the remuneration systems to be disclosed for the first time in the financial year 2021 in accordance with Regulation 2019/2088 - as well as the general market expectation and market development for an ESG-compliant business and risk strategy - has made the need for updating transparent for the institutions subject to Regulation 2019/2088 both with regard to the content of the remuneration systems and with regard to the remuneration governance.