Disclosure of Remuneration Policy and Remuneration Systems Reloaded

The modified CRR II requirements for disclosure of the remuneration policy include a reduction of the group of addressees of the CRR institutions concerned: While the predecessor regulation of Regulation (EU) 575/2013 (CRR) required all CRR institutions to disclose the information on their remuneration policy specified in Art. 450 CRR, the EU legislator now determines in Art. 431 et seq, 450 CRR II, which exempts non-listed small and non-complex institutions from disclosure and provides relief with regard to the scope of disclosure for individual other institutions, in application of the supervisory proportionality principle (small and non-complex institutions and other institutions). This approach is based on the EU legislator’s recognition that the disclosure requirements under Art. 450 CRR are disproportionate and burdensome for smaller institutions (Recital 57 CRR II). The changes to Sec. 16 InstitutsVergV regulatory requirements were required to adapt the disclosure requirements to the EU legal regulations of Art. 431 et seq. CRR II and to take into account that, according to the revised regulatory requirements of the German Banking Act (Kreditwesengesetz, “KWG”) and the InstitutsVergV for the implementation of the requirements of Directive (EU) 2019/878 (CRD V), all (CRR) institutions must now determine risk takers (see our Client Alert on the determination/analysis of risk takers).

Pursuant to Art. 433 para. 2 CRR II, the disclosure of the remuneration policy must be made on the day of the publication of the annual financial statements or “as soon as possible thereafter,” according to the supervisory authority’s understanding, within four weeks after the publication of the financial statements.

1. The classification of CRR institutions in accordance with CRR II as a starting point for the modified requirements of Art. 431 et. seq. CRR II on the disclosure of the remuneration policy

The CRR II requires a graduated application of the content requirements of Art. 450 CRR II on the disclosure of the remuneration policy to CRR institutions, depending on their classification:

(1) Non-listed small and non-complex institutions are not (any longer) subject to the requirements of Art. 450 CRR II and are thus exempt from disclosing information on their remuneration policy in their CRR disclosure report in accordance with Art. 450 CRR II. Art. 4 para. 1 no. 145 CRR II determines the content requirements for the classification as a small non-complex institution, which must be met cumulatively for the classification:

• The institution is not a large institution pursuant to Art. 4 para. 1 no. 146 CRR II.
• Its balance sheet total (on an individual or consolidated basis) did not exceed EUR 5 billion on average in the four-year period preceding the reporting period.
• For the preparation of a restructuring plan, the institution is subject to the simplified requirements of Secs. 19, 20 para. 1 and 41 of the Law on Rehabilitation and Bankruptcy of Enterprises (Sanierungs- und Abwicklungsgesetz, “SAG”).
• Its trading book activities are small in the sense of Art. 94 para. 1 CRR II, i.e., they do not exceed the 5 percent of total assets and EUR 50 million in absolute terms thresholds. The assessment date for compliance with these thresholds is not explicitly determined in Art. 4 para. 1 no. 146 CRR II; from a teleological standpoint, an assessment as of the last calendar day of the reporting year appears plausible.
• Its derivative positions do not exceed the values specified in Art. 4 para. 1 no. 145 lit. e) CRR II, based on the last calendar day of the reporting year.
• Other requirements specified in Art. 4 para. 1 no. 145 lit. f) to i) CRR II are met by the institution.

(2) Listed small and non-complex institutions are subject to simplified disclosure requirements according to Art. 433b para. 1 lit. a)iii) CRR II. They are exempt from the requirements of Art. 450, para. 1 lit. e), f), g), and k), para. 2 CRR II. According to Art. 4 para. 1 no. 148 CRR II, listed institutions are (only) institutions that have issued securities for trading on a regulated market in an EU member state in accordance with Directive 2014/65/EU Art. 4 para. 1 no. 21.

(3) Large institutions must disclose all information specified in Art. 450 paras. 1 and 2 CRR II on an annual basis. Large institutions are defined as any institution that meets at least one of the criteria set out in Art. 4 para. 1 no. 146 CRR II, namely having a balance sheet total of at least EUR 30 billion on an individual or consolidated basis.

(4) Other institutions, i.e., all institutions that do not fall under one of the case groups (1) to (3), are required to disclose the information annually in accordance with Art. 450 para. 1 lit. a) to d) and h) to k) CRR II. This case group includes all non-listed institutions with balance sheets totaling more than EUR 5 billion to less than EUR 30 billion (on an individual or consolidated basis).

2. The (revised) content requirements of Art. 450 CRR II

The EU legislator has made substantive modifications to individual disclosure items but otherwise only made editorial and/or clarifying changes to the wording. In terms of content, the following disclosure items have been specifically modified:

(1) The requirements of Art. 450 para. 1 lit. b) CRR II have been clarified, and now include a disclosure on the correlation between remuneration and employee performance. As a result, the EU legislator has clarified that the information must include an employee-related disclosure. The understanding derived from Art. 450 para. 1 lit. b) CRR on the presentation of the correlation between remuneration and “performance” in the sense of the preceding provision, that the presentation must/could also include an institution-related dimension, is not (or no longer) relevant in practice under Art. 450 para. 1 lit. b) CRR II.

(2) More comprehensive clarifications and individual extensions to the requirements of Art. 450 para. 1 lit. h) CRR II have been made:

• The information on remuneration amounts granted for the financial year must now include a description of the fixed remuneration components for the fixed remuneration amounts (lit. h)i)). The term “for the financial year” refers to the reference period of the reporting year relevant for the remuneration, regardless of when the granted remuneration component/amount is paid or agreed upon.
• A separate presentation of the non-retained and retained remuneration components must be made for the variable remuneration granted (lit. h)ii)). The withheld remuneration components are (only) those that have been deferred in accordance with Sec. 20 paras. 1 and 2 of the Remuneration Ordinance for Institutions (InstitutsVergV).
• All guaranteed variable remuneration granted during the financial year (not just "new hire bonuses" as defined by the CRR) and the number of recipients must be disclosed (lit. h)v).
• The legislator has clarified the separate presentation of severance payments paid in the reporting year based on benefits granted earlier or during the reporting year (lit. h)vi) and vii)). All severance payments must be disclosed, including those that are privileged under the relevant case group of Sec. 5 para. 6 s. 5 InstitutsVergV.

(3) Large institutions and other institutions in accordance with the case groups listed under No. 1 above must provide the information required under Art. 450 para. 1 lit. k) CRR II on their employees identified as risk takers (including a breakdown of total remuneration into fixed and variable remuneration), whose variable remuneration is exempt from the special requirements of Sec. 20 InstitutsVergV. This applies to risk takers with a variable remuneration of up to EUR 50,000 in the case of significant institutions according to Sec. 1 para. 3c) KWG and of qualified non-significant institutions according to Sec. 1 para. 3 s. 2 InstitutsVergV, and to all identified risk takers in the case of all non-significant institutions.

(4) Large institutions must disclose information on the (total) remuneration of the collective performance body, broken down into the (total) remuneration for the executive board and the supervisory body, according to Art. 450 para. 2 CRR II.

The other guiding principles already relevant for disclosure under Art. 450 CRR have been left unchanged by the EU legislator:

• The exceptions to non-essential information disclosure set out in Art. 432 CRR II do not apply to the disclosure of the remuneration policy required by Art. 450 CRR II (Art. 432 para. 1 s. 1 CRR II).
• Institutions that are parent companies or subsidiaries, or that are consolidated in accordance with the (further) regulatory consolidation methods of Art. 18 CRR II, are not required to comply with the disclosure requirements on an individual basis, but only on a consolidated basis.
• Simultaneously, the institutions can apply the supervisory principle of proportionality granted by the legislator in Art. 450 para. 2 s. 2 CRR II for the presentation of the information to be disclosed, i.e., determine the quantitative density of the presentation flexibly with reference to their size, internal organisation, and the type, scope, and complexity of their business activities within the set framework.
• For the disclosure of the remuneration policy, institutions must (also) comply with the (mandatory) data protection requirements of Regulation (EU) 2016/679 (GDPR) (Article 450 para. 2 s. 2 CRR II). This supervisory guideline states that institutions may continue to withhold individualised/individualisable remuneration data in individual cases if the disclosure conflicts with the individual risk taker's legitimate interests.
  

3. The revised EU requirements on the presentation of the remuneration policy disclosure in accordance with the RTS Disclosure: Reporting Forms

In addition to the modified requirements of Art. 450 CRR II, the EU legislator has revised the regulatory requirements for the preparation of the disclosure with the relevant disclosure tables in Art. 17 of the Implementing Regulation (EU) 2021/637 (RTS Disclosure) and determined the reporting forms contained in Annex XXXIII of the RTS Disclosure for this purpose. Annex XXXIV RTS Disclosure contains detailed explanations of these reporting forms.

Accordingly, institutions subject to disclosure requirements must adhere to the guiding principles outlined below:

(1) The reporting form published in Annex XXXIII for the qualitative information on the general remuneration policy to be disclosed pursuant to Art. 450 para. 1 lit. a) to f), j) and k) CRR II serves as a guideline; institutions may modify the reporting form as necessary for the presentation of the relevant remuneration systems.

(2) Annex XXXIII contains additional reporting forms on quantitative data concerning the

• remuneration granted for the financial year (Art. 450 para. 1 lit. h)i) and ii) CRR II),
• retained remuneration components earned in the financial year or granted retained remuneration components from previous reference periods (Art. 450 para. 1 lit. h)iii) and iv) CRR II),
• guaranteed variable remuneration and severance payments subject to disclosure (Art. 450 para. 1 lit. h) v) to vii CRR II),
• individual remunerations to individual risk takers with a total amount of at least EUR 1 million (Art. 450 para. 1 lit. i) CRR II, as well as
• total cumulative remuneration by business line (Art. 450 para. 1 lit. g) CRR II

consequently, are generally required to use.

4. Modifications to the content of Sec. 16 InstitutsVergV... and other InstitutsVergV disclosure requirements

The IVV 4.0 stipulates modifications of the disclosure of the remuneration policy for non-significant institutions in Sec. 16 para. 2 InstitutsVergV: Previously, non-significant institutions with a balance sheet total of at least EUR 3 billion had to disclose the remuneration data specified in Sec. 16 para. 2 IVV 3.0; however, Sec. 16 para. 2 InstitutsVergV now only covers non-significant institutions that are also classified as listed small and non-complex institutions within the meaning of Art. 433b para. 1 CRR II, or as other institutions in accordance with Art. 433c CRR II. All other non-significant institutions, particularly those with a balance sheet total of less than EUR 5 billion on average in the four years preceding the reporting period, are not (or are no longer) subject to the disclosure obligations imposed by Sec. 16 InstitutsVergV.

The disclosure requirements for the significant institutions with the disclosure items specified in Sec. 16 para. 1 InstitutsVergV remain unchanged.

Finally, in the IVV 4.0 unchanged, Sec. 27 para. 1 s. 3 InstitutsVergV states that the superordinate company in a group of institutions must meet the disclosure requirements of Sec. 16 InstitutsVergV at the consolidated level. The superordinate company's group-wide fulfilment of the disclosure requirements under Sec. 16 InstitutsVergV does not affect the obligation of the individual group member (subordinate) company to fulfil the existing disclosure requirements under Art. 431 et seq. and 450 CRR II at the individual institution level.

5. Outlook

The revised regulatory requirements will serve as the audit benchmark for proper disclosure of the remuneration policy in the next audit campaign (Art. 12, 24 of the Audit Ordinance). For this reason, among others, affected institutions must carefully implement the revised supervisory requirements.