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Material Risk Taker @ IFD

The identification of Material Risk Takers according to the Technical Regulatory Standards for Investment Firms (Regulation 2021/2154)

Delegated Regulation 2021/2154 setting out the Regulatory Technical Standards on the identification of staff whose professional activities have a material impact on the risk profile of investment institutions or the assets they manage (Material Risk Takers, MRT) was published in the EU Official Journal on 7 December 2021 and entered into force on 12 December 2021 (RTS-MRT-IFD). This Client Alert explains the main content of the regulatory requirements of the RTS-MRT-IFD.

The RTS-MRT-IFD are 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 EU Directive 2019/3420 (IFD) (see link). The German legislator had to transpose the requirements of the IFD on remuneration systems into domestic law by 26 June 2021 (Art. 67 (1) IFD). On 12 May 2021, the German Bundestag passed the German Investment firms Act (Wertpapierinstitutsgesetz, WpIG), which contains regulations on the remuneration systems of investment firms in Section 46 WpIG and an ordinance authorisation for the Investment firms Remuneration Ordinance (Wertpapierinstituts-Vergütungsverordnung, WVV). BaFin published the draft of the WVV on 4 May 2021 (WVV-E). The final version of the WVV is expected at the end of the first half of 2022.

In Art. 30 (4) IFD, the EU legislator has mandated the EBA to draft the RTS-MRT-IFD in order to ensure a uniform determination of the MRT in the individual jurisdictions covered by the IFD. The EBA published a first draft of the RTS-MRT-IFD on 4 June 2020, subsequently conducted a consultation process, and published the final draft of the RTS-MRT-IFD on 21 January 2021. The final version of the RTS-MRT-IFD takes into account some of the comments and proposed amendments submitted during the consultation process.

 

1. The teleological starting point of the IFD: Prudential proportionality principle and guiding principle of sound compensation coherence

With the revised requirements, the legislator uncouples the remuneration systems for investment firms from the previously generally applicable regulatory regime for the remuneration systems of institutions. The modification of the regulatory framework is based on the maxim of the regulatory proportionality principle, which allows for less stringent requirements for the content of the remuneration systems for many investment firms in view of the lack of deposit business. The supervisory proportionality principle implies a 3 part regulatory system for the revised supervisory remuneration regime, whereby the IFD and the other revised supervisory remuneration regulations cover medium-sized investment firms (see already our Client Alert on the WVV-E).

At the same time, the EU legislator has announced and established a synchronisation with the remuneration systems of institutions in the IFD, according to which terms and definitions already introduced for the remuneration systems of institutions should also be used as a starting point for the content-related requirements for the remuneration systems of medium-sized investment firms (paragraph 12 of the recitals of the IFD; guiding principle of sound compensation coherence). The guiding principle of sound compensation coherence is also to be observed for the identification of the MRT, so that for the interpretation of the content of the individual requirements of the RTS-MRT-IFD, the content-related regulations of the Delegated Regulation 2021/923 of the Commission on the identification of employees whose professional activities have a material impact on the risk profile of an institution (RTS-MRT 2.0, see our Client Alert), are to be applied.


2. Risk Takers and MRT: Art. 30 IFD and RTS-MRT-IFD in interaction

The (EU) legislator differentiates in the requirements for the identification of MRT - as already in the relevant requirements for MRT identification in institutions - between risk takers and identified staff.

In the starting point, Art. 30 (1) IFD determines that the risk takers form part of the group of persons covered by the personal scope of application of Art. 30 IFD (with the special requirements for the design of the (variable) remuneration systems). The legislator determines the following as further groups of persons covered by Art. 30 IFD

  • the senior management (as executive management, which according to Art. 3 (1) no. 27 IFD in conjunction with Art. 4 (1) no. 37 of Directive 2014/65/EU (MiFID II) includes the employees immediately downstream of the management level). Art. 4 (1) no. 37 of Directive 2014/65/EU (MiFID II) includes the employees of the management level immediately downstream of the management body),
  • the employees with a control function and
  • all staff whose total remuneration is at least equal to the lowest remuneration bracket of senior management and risk takers and whose professional activities have a material impact on the risk profile of the investment firm or the assets it manages.

The individual language versions of the IFD and the RTS-MRT-IFD are inconsistent in the further substantiation of the concept of risk takers: While the German language version - as a legal definition (in Art. 30 (1) IFD, Recital 10 RTS-MRT-IFD) - designates all persons who can enter into high risk positions as risk takers, almost all other language versions (including the English, Polish and Swedish versions) do not contain a more detailed definition of risk takers. This inconsistent understanding of terms has no consequences for the practical application of the RTS-MRT-IFD. RTS-MRT-IFD includes all the aforementioned groups of persons in its content (specifically in the qualitative criteria according to Art. 3). It summarises all persons covered by the RTS-MRT-IFD as Identified Staff, who are (or can be) referred to synonymously as MRT in the practical implementation of the determination of the group of persons covered by the RTS-MRT-IFD.

 

3. The initial definitions of. Art. 1 RTS-MRT-IFD: Management responsibility, control task and business area

Art. 1 RTS-MRT-IFD defines the terms relevant for the determination of MRT on the basis of the qualitative criteria of Art. 3 RTS-MRT-IFD:

  • According to Art. 1 no. 1 RTS-MRT-IFD, management responsibility refers to a situation in which an employee manages a business unit or performs a control function in a managerial capacity and is directly accountable to the management body as a whole, to a member of the management body or to the executive board. The definition imposes two requirements for the individual function: The employee must (1) perform a managerial (executive) function in the specific business area/control function, and (2) be directly accountable to the management body or to senior management.
  • Control functions include all functions that are performed independently of the controlled business areas and within the scope of which an objective assessment or a review of the risks of the securities institution is to be carried out or reported on. This includes at least the functions of risk management, compliance and internal audit (Art. 1 no. 2 RTS-MRT-IFD). The EU legislator did not take up the suggestion in the consultation procedure to limit the tasks to the three functions mentioned. When assessing the control functions available to them, investment firms must therefore check whether, in addition to the three functions mentioned, other functions perform control functions within the meaning of Art. 1 no. 2 RTS-MRT-IFD (and are therefore to be regarded as MRT within the meaning of Art. 3 lit. e) RTS-MRTS IFD), such as the functions of IT security.
  • The term "business unit" is derived from the definition in Art. 142 (1) no. 3 CRR (Regulation 575/2013 (EU)). It covers every separate organisational or legal unit, business area or geographical location. The legislator did not adopt the qualification as a significant business area determined for institutions in Art. 1 (1) no. 3 RTS-MRT 2.0 in Art. 1 RTS-MRT-IFD - but determined the purpose of the qualification as a material threshold for the significant influence on the risk profile as a qualitative criterion in Art. 3 lit. d) RTS-MRT-IFD.

 

4. MRT based on qualitative criteria (Art. 3 RTS-MRT-IFD) ... when applied on a stand-alone basis and applied on a consolidated basis

The MRIs to be determined on the basis of qualitative criteria in accordance with Art. 3 RTS-MRT-IFD can be systematically divided into four case groups:

  • MRT by virtue of their function as a governing body and senior management (lit. a) to c)): This group of persons includes all members of the management body (as members with a management function and members with a supervisory function) and all employees of the first management level below the management body.
  • MRT by virtue of a management function in the specific activity (lit. d) to f), h): This group of persons includes all employees who perform the management function for the other activities listed in Art. 3 RTS-MRT-IFD. The legal provisions contain a graduated regulation for this:
    (a) All investment firms shall designate MRTs on the basis of management responsibility for the activities of the control functions and the money laundering function;
    (b) Investment firms (1) authorised to provide at least one of the services set out in Annex I.A nos. 2 to 7 of MiFID II (= investment services and activities involving (2) execution of orders on behalf of clients, (3) dealing on own account, (4) portfolio management, (5) investment advice, (6) underwriting and/or placement of financial instruments with firm commitment, (7) placement of financial instruments without firm commitment) shall identify MRT on the basis of management responsibility for the activities listed in lit. h);
    (c) Investment firms under (b) with a total balance sheet total of at least EUR 100 million shall additionally identify as MRT staff with a management function for business lines that provide at least one of the services listed in Annex I.A. nos. 2 to 7 MiFID II.
  • MRT due to management of a material risk in the investment institution (lit. g)) or responsibility for approving the introduction of new products (lit. i): This group of persons covers MRT who have not already been identified due to management responsibility in the relevant tasks and activities of Art. 3 RTS-MRT-IFD and whose activity covers the management of a material risk in the investment institution. The RTS-MRT-IFD do not define the "material risk" according to this case group in more detail and Art. 28 (3) IFD, to which lit. g) refers, also does not contain a more detailed definition. This group of persons also includes all employees who can make decisions on the introduction of new products (lit. (i)).
  • MRT by virtue of membership in the relevant committee (lit. g) and i): This group covers all persons who are voting members of a committee that is responsible for a material risk in the investment institution (lit. g) or that can take decisions on the introduction of new products (lit. i)).

 

5. MRT based on quantitative criteria (Art. 4 and 5 RTS-MRT-IFD)

For employees (1) with a total annual remuneration of at least EUR 500.000 in or for the previous financial year ("absolute high earners") or (2) who in investment firms with at least 1.000 employees belong to the top 0.3% of the top earners in the securities institution ("top earners") or (3) who were granted a total remuneration in or for the previous business year which is at least equal to the lowest total remuneration granted to an MRT who fulfils one or more of the criteria specified in Art. 3 lit. a), c), d) h) or i) RTS-MRT-IFD ("relative high earners"), Art. 4 (1) RTS-MRT-IFD provides for a presumption of their material influence on the risk profile of the investment institution. The respective remuneration is to be determined on a full-time equivalent basis (FTE), taking into account all fixed and variable remuneration components under supervisory law (Art. 5 (1) RTS-MRT-IFD), whereby the assessment period for the determination of the remuneration is to be determined in the remuneration principles in accordance with Art. 5 (2) RTS-MRT-IFD.

The investment institution may rebut the presumption of conformity in individual cases in accordance with Art. 4 (2) RTS-MRT-IFD (de-identification). For this purpose, it must carry out a comprehensive overall assessment in accordance with the criteria listed in Art. 4 (3) RTS-MRT-IFD. For top earners or absolute high earners with a total remuneration of at least EUR 750,000, de-identification requires the approval of the competent supervisory authority (Art. 5 (4) RTS-MRT-IFD), which the supervisory authority shall only grant in exceptional cases (and with notification of EBA) for a total remuneration of at least EUR 1,000,000 in accordance with Art. 5 (5) RTS-MRT-IFD.

 

6. Further development

The RTS-MRT-IFD came into force on 12 December 2021. It is to be applied directly by the investment firms when - for the first time - determining the MRT. For the investment firms domiciled in Germany covered by the EBA Guidelines 2021/13 on Sound Remuneration Policies for Medium-sized Investment firms (EBA GSR IFD), this time frame of requirements is linked to the status quo that the German legislator has not yet completed the procedure for enacting the WVV. In this regard, BaFin announced in its announcement of 2 November 2021 that it will conduct another consultation procedure on the draft WVV in the first quarter of 2022 (link). Finalisation of the WVV is expected in the course of the first half of 2022. We will accompany the further regulatory development.

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