Investment Firm Remuneration Ordinance – E 2.0

The new consultation draft of BaFin

On 19 October 2022, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, "BaFin") published the updated draft of the Investment Firm Remuneration Ordinance (Wertpapierinstituts-Vergütungsverordnung, WVV-E 2.0) for public consultation. A first draft for the WVV was consulted in May/June 2021 as part of the framework ordinance and did not initially result in a final version. This Client Alert discusses the main substantive provisions of the revised draft.

The WVV is part of the overall package of revised regulatory requirements for the remuneration systems of investment firms. The starting point for this are the requirements of the EU legislator in the EU Regulation 2019/2033 (IFR) and in the Directive 2019/34/EU (IFD). The WVV completes the new regulations of the Securities Institutions Act (WpIG), which came into force on 26 June 2021. Sec. 46 of the WpIG contains regulations on the remuneration systems of investment firms and the statutory authorisation to issue the WVV.

The first draft of the WVV (WVV-E 1.0) was published in May 2021 for consultation purposes (see also our previous Client Alert). Initially, it did not result in the enactment of the WVV. Rather, in view of the content-related suggestions in last year’s consultation as well as the guidelines for sound remuneration policies published by the European Banking Authority (EBA) in the meantime (GSR IFD, see our previous Client Alert on GSR IFD), the legislator felt compelled to revise the content of the initial draft and to initiate a further consultation procedure on the revised WVV-E 2.0. The WVV-E 2.0 addresses individual suggestions from last year’s consultation procedure and partly (still) differs in content from individual announcements of the EBA in the GSR IFD. Without any changes the WVV-E 2.0 takes over established guidelines from the Remuneration Ordinance for Institutions (Institutsvergütungsverordnung, “IVV”), especially in the general guidelines for the remuneration systems, so that the legal practitioner can fall back on the practical experience of the institutions and other stakeholders (including supervision, auditors) in the implementation of the IVV when applying the content of the relevant guidelines.

1. Personal scope of application of the WVV: Risk Takers in MSIFs and in superordinate companies – with a broad definition of employees

According to Sec. 1 (1) WVV-E 2.0, the WVV exclusively applies to MSIFs within the meaning of Sec. 2 (17) WpIG (see also our Client Alert on WVV-E 1.0 for the applicable legal framework for other investment firms). Supplementary to WVV E-1.0, Sec. 1 (2) WVV-E 2.0 clarifies that the WVV is also applicable to superordinate companies of a group of investment firms within the meaning of Sec. 3 (12) WVV-E 2.0; this also covers superordinate companies within the meaning of Sec. 3 (12) WVV-E that are not investment firms within the meaning of Sec. 2 (17) WpIG (Sec. 1 (2) sentence 2 WVV-E 2.0).

Unchanged from the WVV-E 1.0 and explicitly clarified in the WVV-E 2.0, the personal scope of application of the WVV is exclusively limited to Material Risk Takers (Sec. 1 (1) WVV-E 2.0). The German legislator thus continues to deviate from the requirements of Art. 26 (1) IFD, which stipulates the application of the general legal requirements for the implementation of a remuneration policy and the supervisory guiding principle of a gender-neutral remuneration policy and practice to the remuneration systems of all employees of MSIFs. The EBA also states in the GSR IFD that the general requirements of Art. 26 (1) IFD are applicable to the remuneration systems of all MSIFs’ employees.

Pursuant to Sec. 3 (2) WVV-E 2.0, Material Risk Takers include Managing Directors pursuant to Sec. 2 (36) WpIG as well as all employees of the MSIF whose professional activities have a material impact on the risk profile of the MSIF or the assets it manages. Pursuant to Sec. 4 WVV-E 2.0, MSIF must identify the Material Risk Takers in a Risk Taker analysis. This is based on the criteria of the Delegated Regulation (EU) 2021/2154 (RTS MRT, see our Client Alert on the identification of material Material Risk Takers according to the Technical Regulatory Standards for investment firms). In addition to employees in an employment with the MSIF, the aforementioned groups of persons also include external persons who fulfil the requirements of Sec. 3 (8) WVV-E 2.0 (external employees). The differentiation of external employees according to Sec. 3 (8) WVV-E 2.0 from other external persons working for the MSIF can be based on the differentiation criteria developed in practice for institutions according to Sec. 2 (7) IVV.

2. General requirements for the content of remuneration systems: principle of proportionality, continuation of guiding principles from the IVV

The legislator continues to use in an unchanged manner the supervisory principle of proportionality as a starting point for the content of the remuneration systems, according to which the individual MSIF must take into account its size, internal organisation and the complexity of its business when implementing the provisions of the WVV (Sec. 7 (6) WVV-E 2.0). This guiding principle opens up design options in individual cases, according to which, for example, MSIFs with a less complex business strategy and/or a centralized internal organisation with comprehensive control mechanisms can determine the concrete remuneration parameters (e.g. for determining the ratio between fixed remuneration and variable remuneration) more flexibly.

The general requirements for the content of the remuneration systems set out in Secs. 3 and 7 WVV-E 2.0 essentially follow, with individual modifications, the remuneration system already established in the IVV, i.e. among other things

  • the remuneration systems must contain a transparent classification of the individual remuneration as fixed or variable remuneration, whereby all financial and services relevant to the case of the MSIF and of third parties that the individual Material Risk Taker receives with regard to his professional activity for the MSIF are to be classified as remuneration (Sec. 3 (1) WVV-E 2.0), and (only) those remuneration components are to be qualified as fixed remuneration that meet the requirements of Sec. 3 (4) WVV-E 2.0. These provisions are identical in content to the provisions of Sec. 2 (1) and (6) IVV, so that MSIF can make use of the supervisory understanding there when verifying the individual remuneration components, for example to deny the status of individual services as supervisory remuneration, which have no substantive connection to the professional activity of the Material Risk Taker for the MSIF. In deviation from WVV-E 1.0 and in accordance with Sec. 2 (6) sentence 3 IVV, Sec. 3 (4) sentence 3 WVV-E 2.0 now stipulates that temporary function allowances (and not solely foreign allowances) are also to be regarded as fixed remuneration within the meaning of Sec. 3 (4) sentence 1 WVV-E 2.0.
  • the remuneration systems must be gender-neutral (Sec. 7 (1) no. 2 WVV-E 2.0). The guiding principle of gender neutrality covers – comparable to the regulation of Sec. 5 (1) no. 6 IVV for the institutions – relevant requirements for the content design and for the remuneration governance (see our previous Client Alert on IVV 4.0).
  • severance payments and non-competition payments are generally considered variable remuneration (Sec. 7 (4) sentence 1 WVV-E 2.0) and are only not subject to the core supervisory regulations on variable remuneration if they can be assigned to a case group of Sec. 7 (4) sentence 5 WVV-E 2.0. Pursuant to Sec. 7 (4) sentence 5 no. 3 WVV-E 2.0, the quantitative privilege already applies if the severance payment does not exceed the monetary amount of EUR 200,000; the legislator did not include the additional quantitative requirement of a maximum amount of 200% of the last fixed remuneration received stipulated for institutions in Sec. 5 (6) sentence 5 no. 3b) IVV in Sec. 7 (4) sentence 5 no. 3 WVV-E 2.0. In addition, MSIFs must also document the settlement principles (Secs. 7 (4) sentence 2, 14 (1) no. 3 WVV-E 2.0).
  • the remuneration systems of Material Risk Takers in control units are in principle subject to the additional requirements already known from Sec. 9 IVV, according to which the performance parameters for variable remuneration may not run counter to the control function and the total remuneration must consist predominantly of fixed remuneration components (Sec. 7 (3) WVV-E 2.0). The legislator has not stipulated the relevant quantitative scope for the “predominant” share of the fixed remuneration. In terms of content, MSIFs will have to concretise the term with reference to the “focus” of the fixed remuneration components of the comparable provision of Section 9 (2) IVV (in our opinion, the different choice of term does not prevent the application of the principles developed for Sec. 9 (2) IVV, given the identical teleological purpose of the two provisions). Thus, a “predominant” share of the fixed remuneration should (already) exist if the fixed remuneration components account for more than 50% of the total remuneration.

3. General requirements for the variable remuneration of Material Risk Takers: ratio between fixed and variable remuneration and proportionality principle

The general requirements for variable remuneration stipulated in Sec. 8 WVV-E 2.0 focus on the framework conditions for the ratio between fixed and variable remuneration as well as on requirements for the admissibility of guaranteed variable remuneration. Sec. 8 (1) WVV-E 2.0 stipulates as an essential guiding principle that MSIFs must determine an "appropriate" value for the ratio between the variable and fixed remuneration of the Material Risk Takers and must carry out the quantitative stipulation in application of the supervisory proportionality principle and, for this purpose, must take into consideration the business activity, the associated risks and the effects of the Material Risk Takers on the risk profile of the MSIF for the specific ratio value. Sec. 8 (1) WVV-E 2.0 does not set a cap for the ratio between variable and fixed remuneration. Therefore, in practice, caps of more than 200% are likely to be permissible in individual cases. When finally setting the cap, MSIFs must note the requirement of Sec. 8 (3) WVV-E 2.0, according to which there must be no significant dependence of the Material Risk Taker on the variable remuneration; this requirement has both an absolute dimension (= quantitative amount) and a relative dimension (= ratio of the fixed remuneration to the variable remuneration).

4. Special requirements for the variable remuneration of Material Risk Takers: Double proportionality principle and its content-related scope

The special content-related requirements for the variable remuneration of Material Risk Takers, which are now regulated in Secs. 9 to 11 WVV-E 2.0, stipulate a double proportionality principle as a starting point:

  • Generally exempt from the requirements of Sec. 9 (3) to (5) (as well as Sec 10 (2) WVV-E 2.0 for the granting of variable remuneration are MSIFs that meet the requirements of Sec. 44 (3) sentence 2 WpIG, i.e. whose balance sheet and off-balance sheet assets (in each case according to the average of the last four preceding business years) do not exceed (i) EUR 100 Mio., or (ii) EUR 300 Mio. and that meet the further requirements of Sec. 44 (3) sentence 2 no. 2 WpIG). The issuer of the ordinance links the exemption to the scope of application of Sec. 44 (3) sentence 2 WpIG, which stipulates the possibility for the investment firms covered to waive the establishment of, inter alia, the Remuneration Control Committee if the requirements of Sec. 44 (3) sentence 2 WpIG are met. There are strong reasons for stipulating the quantitative limits on the basis of a solo MSIF assessment (see also below).
  • All other MSIFs do not have to note the requirements of Sec. 9 (3) to (5) (as well as Sec. 10 (2)) WVV-E 2.0 regarding the granting of variable remuneration for Material Risk Takers whose variable remuneration does not exceed the annual (total) amount of EUR 50,000 and at the same time does not exceed 25% of their individual total annual remuneration.

For the quantitative requirements stipulated in Sec. 44 (3) sentence 2 WpIG for the privileged treatment of MSIFs, inter alia, in the (non-)establishment of the Remuneration Control Committee, weighty arguments can be put forward for a consideration at solo-investment firm level. In favour of the group level seems to be the provision of Sec. 38 (6) WpIG, according to which the provisions of Secs. 38 et. WpIG are to be applied to MSIFs on an individual basis as well as on a consolidated basis, whereby with Sec. 38 (6) WpIG the legislator has transposed the provisions of Sec. 25 (4) IFD, which are identical in content, into the WpIG. On the other hand, in Sec. 44 (3) sentence 3 WpIG the legislator has obviously referred to the solo investment firm the possibility of the so-called equal welfare order, according to which the BaFin may order in individual cases for a MSIF, among other things, the establishment of a Remuneration Control Committee even if the thresholds of Sec. 44 (3) sentence 2 WpIG are not met, if this is "required due to the [...] characteristics of the group to which the [MSIF] belongs". From a teleological point of view, weighty reasons can also be given for an assessment at solo-investment firm level: The exemption of MSIFs from the establishment of a Remuneration Control Committee pursuant to Sec. 44 (3) sentence 2 WpIG is based on the typifying assumption of the legislator that MSIFs are to be exempted from the establishment of the Remuneration Control Committee when the threshold is reached at the solo-investment firm level, because in the case of a total sum of off-balance sheet and on-balance sheet assets below the threshold the functions of the Remuneration Control Committee specified in Sec. 44 (6) WpIG are not required for the implementation of the remuneration systems, since in this case the MSIF does not have to record the typified quantitative risks in its business and risk strategy, which are the basis of the typified assumption of the legislator on the necessary bundling of remuneration expertise in the Remuneration Control Committee to be established for this purpose. This teleological consideration is comparable to the similar legal requirements of Sec. 25d (7) KWG for the non-establishment of a Remuneration Control Committee, which for the assessment of the non-establishment is also based on the solo investment firm for reasons of proportionality. For an established Remuneration Control Committee, Sec. 18 WVV-E 2.0 stipulates the legal framework for the specific tasks.

5. Special requirements for the variable remuneration of Material Risk Takers: Performance evaluation before and after the determination of a variable remuneration

All MSIFs must note the requirements of Sec. 9 (1), (2) and (6) WVV-E 2.0 regarding the performance parameters of the variable remuneration and use performance parameters at the levels of the MSIF, the business area/organisational unit and the individual performance contributions of the Material Risk Takers for this purpose, whereby both financial and non-financial remuneration parameters are to be applied for the individual performance contributions (Sec. 9 (1) sentence 1, (2) sentence 1 WVV-E 2.0). The term performance evaluation corresponds to the term ex ante and ex post risk adjustment used in the IVV. The performance evaluation prior to the determination of the variable remuneration shall be performed on the basis of an assessment period of at least one year. The legislator does not stipulate any further requirements for the quantitative weighting of the three performance parameter levels - and gives the remuneration practice greater freedom of design for the weighting than the statutory regulation of Sec. 19 (1) s. 1 IVV for the institutions, which stipulates (at least) an 'appropriate' consideration of the individual levels in the determination of the overall target achievement. The remuneration practice will - in view of the legal purpose of the mandatory consideration of the three levels - at the same time fall back on the practical experience in the implementation of Sec. 19 (1) sentence 1 IVV and take into account the individual level with a weighting of at least 10% of the overall target achievement. In deviation from Sec. 9 (2) sentence 1 WVV-E 2.0, MSIFs may only set non-financial performance parameters for Material Risk Takers of control units (Sec. 9 (2) sentence 2 WVV-E 2.0). In addition, Sec. 9 (2) sentence 1 WVV-E 2.0, in deviation from Sec. 19 (2) sentence 1 IVV, does not necessarily require the determination of individual performance contributions in a target agreement, so that MSIFs can alternatively - in addition to the target agreement, which is still generally recommendable in practice - also unilaterally specify these to the Material Risk Takers.

For the performance assessment, Sec. 9 (6) WVV-E 2.0 stipulates that in the event of a weak or negative financial result of the MSIF, up to 100% of the variable remuneration shall be waived. From a labour law perspective, this requirement includes two challenges for remuneration practice: (1) When does a specific 'weak' financial result of the MSIF exist - already in the case of a (material) shortfall of the relevant planned value or is an absolute consideration required? (2) The requirement is not compatible with the case law of the German Federal Labour Court on variable remuneration components, the amount of which (also) depends on the work performance (= individual performance parameters) and for which the German Federal Labour Court has established the legal principle that a minimum amount is to be set for the variable remuneration if these individual performance parameters are achieved (judgement of 19 March 2014, 10 AZR 622/13). Remuneration practice will have to develop needs-based solutions in this regard.

Sec. 9 (3) to (5) WVV-E 2.0 stipulates specifically that (i) at least 40% of the variable remuneration must be withheld over a period of 3 to 5 years and, in the case of 'particularly high' variable remuneration, the proportion of the remuneration to be withheld must be at least 60%, whereby the legislator does not make any specific stipulations regarding the quantitative definition of the 'particularly high' variable remuneration, and (ii) at least 50% of the variable remuneration must consist of a remuneration component linked to the sustainable performance of the MSIF (NWE component). For the distribution of the NWE component to the retained/non-retained remuneration components, the legislator does not make any concrete specifications, so that MSIFs can develop needs-based solutions in their remuneration practice.

Sec. 9 (5) WVV-E 2.0 regulates the malus and clawback system to be established by the MSIF for variable remuneration. The hard malus/clawback circumstances stipulated in Sec. 9 (5) sentence 2 WVV-E 2.0 on the one hand go further than the regulations of Sec. 18 (5) sentence 3 IVV, according to which a complete cancellation/repayment of the relevant variable remuneration component is also to be performed if the Material Risk Taker can no longer be considered competent and reliable for his activity (Sec. 9 (5) sentence 2 no. 3 WVV-E 2.0). On the other hand, the scope of application of the defined malus circumstances is limited exclusively to Material Risk Takers who are not subject to the privileged treatment of Sec. 11 WVV-E 2.0.

6. Further requirements of the WVV-E 2.0

Further requirements of the WVV-E 2.0 are known from the comparable regulations of the IVV:

  • MSIFs must document the principles of the remuneration systems in organisational guidelines with the minimum content stipulated in Sec. 14 WVV-E 2.0, which must also contain documentation of the responsibilities and decision-making authorities of the individual stakeholders.
  • The annual review of the appropriateness of the remuneration systems stipulated in Sec. 15 WVV-E 2.0 is basically modelled on Sec. 12 IVV, but still includes the performance of a "central and independent internal audit".
  • The information of the Risk Takers on the structure of the remuneration systems stipulated in Sec. 16 WVV-E 2.0 is modelled on Sec. 13 IVV, whereby the legislator stipulates (only) the text form for the information.

In the WVV-E 2.0, the legislator no longer pursued the separate disclosure requirements on remuneration systems still stipulated in Sec. 14 WVV-E 1.0. Therefore, MSIFs have to disclose the remuneration systems exclusively according to Art. 51 IFR.

7. Group-wide regulations on remuneration

The requirements for the group-wide remuneration strategy are now contained in Sec. 19 WVV-E 2.0, according to which the superordinate company must determine the group-wide remuneration strategy for implementing the requirements of Sec. 46 WpIG and WVV-E 2.0 for the remuneration systems of the subordinate companies and monitor its implementation. In addition, the superordinate company must stipulate the group of group Material Risk Takers on the basis of the consolidated situation, which are to be determined according to the criteria of the RTS MRT.

8. Outlook

The consultation process initiated by BaFin with the publication of the WVV-E 2.0 ended on 21 November 2022. In view of the (further) lapse of time that has occurred in the meantime, an enactment of the WVV in this calendar year is no longer to be expected, so that MSIFs must extend the forecast for the implementation of the final regulatory requirements for the remuneration systems of their employees to the calendar year 2023.

Did you find this useful?