The regulations on remuneration systems in the draft bill of the RiG
The Federal Ministry of Finance has published the draft bill for the RiG on 22 April 2020. With RiG, the German legislator will implement, among other things, the extended requirements of CRD V on remuneration systems in institutes. In particular, the RIG contains also regulations on the revised criteria of the significant institute and the risk taker-analysis.
Introduction: RiG, CRD V and Sound Compensation
On 22 April 2020, the Federal Ministry of Finance published the draft reference to the Act on Risk Reduction and Proportionality in the Banking Sector (Risk Reduction Act, RiG). With the RiG, the German legislator is to implement, among other things, requirements from EU Directive 2019/878/EU (CRD V). With regard to the revised provisions of CRD V on the remuneration systems for management and employees (for details, see our Client Alert on the readjustment of remuneration systems in accordance with CRD V), the German legislator is implementing the provisions in two parts: The revised EU legal requirements for the sound compensation-related (legal) definition of a significant institution and for the legal framework for the analysis of employees with a particular influence on the risk profile of the institution (so-called risk takers) are implemented by the German legislator in the German Banking Act (KWG); the RiG contains a draft law for this purpose (KWG-RefE). The German legislator will implement the revised provisions of CRD V on the content of the remuneration systems (especially on the variable remuneration of risk takers) in the revised version of the Institutsvergütungsverordnung (InstitutsVergV 4.0).
Risk Taker Analysis reloaded: For all - with two new exceptions
The main innovation in the RiG on sound compensation is the extension of the risk taker analysis to all CRR institutions as well as to all other institutions that are significant, as stipulated in Section 25a (5b) sentence 1 KWG-RefE. Previously, according to the current version of Section 25a (5b) sentence 1 of the German Banking Act (KWG), only significant institutions were required to perform the risk taker analysis. According to the RiG, however, finance leasing and factoring institutions are no longer required to perform a risk taker analysis under the new version of Section 2 (7a) KWG-RefE.
The new statutory system for risk taker analysis
The new version of Section 25a (5b) KWG-RefE contains a graduated system for the concrete implementation of the risk taker analysis:
As before, significant institutions must carry out a comprehensive risk taker analysis in accordance with Section 25a (5b) sentences 2 to 6 KWG-RefE and the requirements of the Delegate Regulation (EU) No. 604/2014 (RTS-MRT). On 19 December 2019, EBA published a draft of the revised version of the RTS-MRT (RTS-MRT 2.0), which is to lead to a final draft version in 2020 and subsequently be adopted by the Commission. For the risk taker analysis, RTS-MRT 2.0 will, among other things, extend the criteria for defining (a) employees with management responsibility, (b) employees in control functions and (c) the main business area.
In contrast, all the institutions concerned must identify the risk takers defined in Section 25a (5b) sentence 1 KWG-RefE. This group of persons - generally without exception - must include (1) the members of the business management and the administrative or supervisory body of the institution (Section 1 (21) sentence 2 KWG-RefE), (2) the employees of the next management level, (3) the employees with management responsibility for the control functions or the main business areas of the institution, and (4) the employees who in the previous financial year (a) were entitled to remuneration in the amount of at least EUR 500,000, provided that the remuneration of the member of staff is at least equal to the average remuneration of the directors, members of the administrative or supervisory body and members of the institution’s next level management, and (b) those members of staff who carry out professional activities in a significant business area, provided that the activity has a significant impact on the risk profile of the business area concerned. In contrast to the comprehensive risk taker analysis which only significant institutions are required to perform, the documentation of the identification may focus on the presentation of the specific group of persons and its derivation for supervisory purposes. The regulatory derivation for the individual functions must be carried out using the criteria of the RTS-MRT (Section 25a (5b) p. 7 KWG-RefE).
Readjustment of the status as a significant institution
The RiG also readjusts the definition of a significant institution. Section 25n KWG is repealed. The regulatory requirements now contained in Section 1 (3c) of the KWG-RefE are based on the previous system of Section 25n KWG. The status of a significant institution can continue to be determined alternatively according to quantitative criteria in accordance with Section 1 (3c) sentence 1 KWG-RefE (balance sheet total of EUR 15 billion) or according to the qualitative criteria of Section 1 (3c) sentence 2 KWG-RefE. The qualitative criteria of Section 1 (3c) sentence 2 KWG-RefE continue to correspond to the qualitative criteria of Section 25n (2) KWG.
For the quantitative criteria, the RiG has two new provisions: The reference period for assessing whether the balance sheet total of EUR 15 billion has been exceeded is now four financial years. Institutions that exceed this balance sheet total over this reference period are to be assigned to the group of significant institutions without exception; in future they will no longer be able to make the "exculpation" that was previously possible under Section 25n (1) 2. Hs. KWG.
The possible classification of an institution that fulfils neither the quantitative criteria nor the qualitative criteria of Section 25n (1) or (2) KWG as a significant institution in accordance with the criteria specified in Section 25n (3) KWG, as provided for in the previous version of Section 25n (3) KWG, is to be regulated in the InstitutsVergV 4.0 in accordance with the announcement in the explanatory memorandum to the RiG.
Extension of the group-wide scope of application
In the new version of Section 25a (6) sentence 1 no. 1 of the KWG-RefE, the RiG provides for an extension of the power to issue regulations on the content of remuneration systems in accordance with the InstitutsVergV to group companies that are not subject to the scope of the KWG. The extension of the power to issue ordinances is initially aimed at capital management companies belonging to the group which are subject to the current legal requirements of the KAGB and the AIFM Directive (2011/61/EU) or the UCITS Directive (2014/91/EU), and are not subject to any legal quantitative requirements regarding the maximum ratio between variable and fixed remuneration and in future – in the event of the expected implementation of this regulation authorisation in InstitutsVergV 4.0 – must also observe the upper limit of 1:1 or a maximum of 2:1 (if authorised by the shareholders of the institute).
Extended authority of the supervisory authority according to Section 45 KWG-RefE
In Section 45 KWG-RefE, the RiG extends the powers of intervention of the supervisory authority to order the reduction of the total bonus pool in accordance with Section 45 (2) nos. 10 and 11, (7) to (10) KWG-RefE. This is in terms of time, as the supervisory authority can now issue corresponding orders in the event of a risk situation with regard to regulatory capital and liquidity requirements. In terms of content, Section 45 (7) and (8) sentence 1 KWG-RefE clarifies that the order to reduce or delete the variable remuneration of risk takers can also include the variable remuneration components already determined but not yet earned during the retention period (cf. Section 20 (4) InstitutsVergV). Compared to the current provision of Section 45 (5) sentence 10 of the KWG, Section 45 (9) sentence 2 KWG-RefE, which is unchanged, stipulates that no rights can be derived from contractual provisions on variable remuneration that conflict with an order pursuant to Section 45 (2) nos. 10 and 11 KWG-RefE or pursuant to Section 45 (7), (8) sentences 1 to 3 KWG-RefE.
Going forward: Adoption of the RiG and the InstitutsVergV 4.0 still in 2020?
The legislative procedure for the RiG is to be completed before the end of this calendar year in order to meet the deadline set in the CRD V for the implementation of the revised EU legal provisions, including those on remuneration systems, by 28 December 2020. The new provisions will then – probably – be applicable to the remuneration systems for the first time in calendar year 2021. InstitutsVergV 4.0, which is also generally to be issued by 28 December 2020, will complete the picture of the new statutory regulations on the remuneration systems in accordance with the EU legal requirements of CRD V. We will keep you informed about the further legislative process.