Risk Taker-Analysis reloaded

1. The regulatory framework: CRD V and Sound Compensation

With the RTS-MRT 2.0, the EBA and the Commission have implemented the regulatory mandate of the EU legislator from Art. 94 (2) of EU Directive 2013/36 (as amended by Directive 2019/878 (CRD V)) and thus completed the revised EU regulations for the Risk Taker analysis. The German legislator had previously implemented the CRD V requirements for Risk Taker analysis for all CRR institutions with the revised version of Section 25a (5b) KWG. The German legislator will implement the revised content of the CRD V requirements on remuneration systems (especially on the variable remuneration of Risk Takers) in the revised version of the Remuneration Ordinance for Institutions (IVV 4.0), the final version of which - following the already completed consultation procedure of BaFin - is expected for the second half-year of 2021.

2. The new (graduated) legal system: Risk Taker analysis for (almost) all and supplementary requirements for important institutions

The new version of Sections 25a (5b) s. 1 of the German Banking Act (Kreditwesengesetz, KWG) contains a graduated system for the concrete implementation of the Risk Taker analysis:

All CRR institutions and all significant institutions must conduct a Risk Taker analysis with the criteria specified in Sections 25a (5b) s. 1, 1 (21) KWG. With this regulation, the German legislator is implementing the requirements of Art. 92 (3) CRD V. The Risk Takers to be identified according to Sections 25 (5b) s. 1, 1 (21) KWG are to be identified according to three case groups characterised by qualitative criteria and one case group with quantitative-qualitative criteria:

Risk takers that can be derived from qualitative criteria are (1) members of the management and the administrative or supervisory body of the institution (Sections 25 (5b) s. 1 nos. 1 and 2, 1 (21) KWG), (2) employees of the subordinate management level and (3) employees with management responsibility for the control functions or the main business areas of the institution.

Section 25 (5b) s. 1 no. 3 KWG further determines as Risk Takers to be determined according to quantitative-qualitative criteria those employees who cumulatively fulfil the following requirements: (a) Entitlement to remuneration of at least EUR 500,000 in or for the preceding business year, which at the same time corresponds at least to the average remuneration of the managing directors and the management level immediately downstream of the management (= remuneration limit as quantitative criterion), and (b) Exercise of the professional activity in a significant business area and significant impact of the activity on the risk profile of the business area (qualitative criterion). The content of the relevant terms for the aforementioned groups of persons must be filled out on the basis of the content specifications of the RTS-MRT 2.0 (Section 25a (5b) s. 6 KWG).

Significant institutions must carry out a comprehensive Risk Taker analysis in accordance with Section 25a (5b) s. 2 to 6 KWG and the requirements of RTS-MRT 2.0. To this end, the RTS-MRT 2.0 has further developed the qualitative criteria for determining Risk Takers set out in Art. 3 of Delegated Regulation 604/2014 (RTS-MRT 1.0) (Art. 5 RTS-MRT 2.0) and modified the quantitative criteria of Art. 4 RTS-MRT 1.0 for determining Risk Takers (Art. 6 RTS-MRT 2.0).

3. Risk Taker according to qualitative criteria for (almost) All: Material business unit, control function and managerial responsibility.

The RTS-MRT 2.0 further develops the qualitative criteria of material business unit, control function and management responsibility for the Risk Takers to be determined by all CRR institutions and all significant institutions pursuant to Section 25a (5b) s. 1 nos. 1 and 2 KWG.

According to Art. 1 no. 3 RTS-MRT 2.0, a material business unit is any business area within the meaning of Art. 142 (1) no. 3 of EU Regulation 575/2013 (as amended by Regulation 2019/876, CRR II) (= separate organisational or legal entities, business lines or geographical locations) that either (a) has an allocated internal capital of at least 2% of the institution's internal capital within the meaning of Art. 73 of CRD V, (b) is otherwise assessed by the institution as a business area with a material impact on the institution's internal capital or (c) includes a core business area according to Art. 2 (1) no. 36 of EU Directive 2014/59/EU (= any business area that represents a material source of income for the institution or the group to which the institution belongs). The case groups (b) and (c) contain an extension of the RTS-MRT 1.0 for the definition of the material business line. They are primarily intended to cover institutions that do not perform a quantitative allocation of internal capital to the individual business lines. These institutions have to carry out a self-analysis to determine the material impact on internal capital - and also for the core business areas. The RTS-MRT 2.0 does not specify the criteria for the self-analysis in more detail. The EBA has announced in the consultation procedure that institutions have to establish and apply suitable criteria for this individually.

Control functions include all functions that are independent from the controlled business units and that are responsible to provide an objective assessment of institution’s risks, review or report on those, including, but not limited to, the risk management function, the compliance function and the internal audit function (Art. 1 no. 2 RTS-MRT 2.0). Institutions must additionally - beyond the previous regulations of Art. 3 no. 4 RTS-MRT 1.0 - identify all other functions relevant for management responsibility that have to carry out an objective assessment or a review of the risks of the institution or have to report on them.

According to Art. 1 no. 1 RTS-MRT 2.0, managerial responsibility within the meaning of Section 25a (5) sentence 1 No. 2 KWG is exercised by all employees who (a) manage the material business area or exercise a control function in a managerial capacity and are directly accountable to the management body as a whole, to a member of the management body or to the executive board (this typically concerns all employees at the first reporting level), or (b) in a large institution within the meaning of Art. 4 (1) no. 146 CRR II in the relevant material business area, manage a subordinate business area or perform a subordinate control function in a managerial capacity and report to a member of staff who has one of the responsibilities listed under lit. a).

4. Additional Risk Takers according to qualitative criteria for significant institutions (Art. 5 RTS-MRT 2.0)

For the group of Risk Takers to be determined according to qualitative criteria, significant institutions must also identify the other persons listed in Art. 5 RTS-MRT 2.0 as Risk Takers in addition to the groups of persons in Section 25a (5b) s. 1 nos. 1 and 2 KWG. The catalogue of Art. 5 RTS-MRT 2.0 contains - compared to the previous version of Art. 3 RTS-MRT 1.0 - an expansion of the group of persons among the employees with management responsibility in the relevant areas to include the heads of accounting, money laundering, information security and outsourcing management. The content of the MRT system has remained largely unchanged due to (1) management activities relating to one of the risk activities listed in Art. 79 to 87 CRD V or due to membership in committees deciding on such activities (whereby now only committee members with voting rights are to be identified as Risk Takers), as well as (2) due to responsible participation in individual transactions with credit risks amounting to 0.5% of the institution's Common Equity Tier 1 capital, at least EUR 5 million, or membership as a voting member in a committee deciding on such transactions.

5. Risk Taker based on quantitative-qualitative criteria for (almost) All (Section 25a (5b) s. 1 no. 3 KWG: significant influence of the professional activity on the risk profile of the significant business area) - and presumption effect with rebuttal possibility for significant institutions (Art. 6 RTS-MRT 2.0)

Compared to the previous version of Art. 4 RTS-MRT 1.0, the legislator has extensively modified the case group of Risk Takers to be determined according to quantitative-qualitative criteria.

For this purpose, all CRR institutions and significant institutions must fill out the quantitative criteria (remuneration limit) and qualitative criteria (exercise of professional activity in a significant business area and significant impact of this activity on the risk profile of the business area in question) specified in § 25a (5b) s. 1 no. 3 KWG.

Art. 3 RTS-MRT 2.0 determines for the first time - in implementation of the requirement of Art. 94 (2) lit. b) CRD V - concrete criteria for the assessment of the significant influence of the professional activity of the relevant employee on the significant business area of the institution. In terms of content, the EU legislator develops the previous system of Art. 4 (2) lit. b) RTS-MRT 1.0 with regard to the relevant influence of the individual employee on the risk profile of a significant business area. It modifies - as already laid down in Art. 92 (3) lit. c) (iii), 94 (2) CRD V - compared to RTS MRT 1.0/Art. 92 CRD IV the quality of the influence on the risk profile of the material business area from "material impact" to "significant impact". In terms of content, this linguistic modification has no material relevance: The catalogue of Art. 3 RTS-MRT 2.0 is of a formal nature, according to which the institutions have to take into account all the criteria listed in the assessment and to document the system developed for this purpose in their remuneration principles. The EU legislator leaves the content of the criteria including the relevant material parameters/thresholds for the assessment of the significant influence of the individual employee on the risk profile to the individual institution. This regulatory framework allows the institutions to develop and apply a system according to their needs. (Significant) Institutions that already had to identify Risk Takers under the previous legal situation in accordance with Section 25a (5b) KWG (in its former version) can therefore continue to develop their previous system for the de-identification of employees as Risk Takers on the basis of quantitative criteria in accordance with Art. 4 (2) lit. b) RTS-MRT 1.0 - as far as this continues to be suitable - and complete it with criteria that still need to be added in accordance with the catalogue of Art. 3 MRT 2.0.

In the consultation procedure, the EBA announced that the institutions may apply the supervisory proportionality principle in the development and application of the system, according to which small, non-complex institutions already fulfil the requirements of Art. 3 RTS-MRT 2.0 by using compact instruments (e.g. scorecards) and their documentation, while large institutions should develop a comprehensive assessment system with quantitative and qualitative assessment criteria.

For employees (1) in significant institutions with a total annual remuneration of at least EUR 750,000 or (2) who belong to the top 0.3% of the top earners in the institution in significant institutions with at least 1,000 employees, Art. 25a (5b) s. 2 KWG in conjunction with Art. 6 (1) RTS-MRT 2.0 stipulates a presumption of material influence. Art. 6 (1) RTS-MRT 2.0 establishes a presumption of their material influence on the risk profile of the institution. These revised quantitative criteria contain a considerable relief compared to the previous lower remuneration limit for the presumption of conformity according to RTS-MRT 1.0, which, among other things, was linked to the lowest total remuneration of the Risk Takers listed in detail in Art. 4 (1) lit. c) RTS-MRT 1.0 on the basis of qualitative criteria and had determined the absolute amount of the total annual remuneration for the general presumption of conformity at EUR 500,000.
The institution may rebut the presumption of conformity in individual cases in accordance with Art. 6 (2) RTS-MRT 2.0 (de-identification). The institution must apply for de-identification to the competent supervisory authority without delay, at the latest six months after the end of the relevant business year (Art. 25a (5c) KWG). The application must contain the argumentation and relevant (evidence) documentation relevant for the rebuttal (Art. 6 (3) s. 2 RTS-MRT 2.0).

6. Implementation in the remuneration systems

The revised version of Section 25a (5b) KWG came into force on 29 December 2020. For the first time (only) since the entry into force of the RTS-MRT 2.0, institutions can carry out the Risk Taker analysis in accordance with the new legal regulations - and will have to do so in the second half-year of 2021 (then for the reference period following this date). This is also against the background that the Risk Taker analysis is - unchanged - the subject of the mandatory audit catalogue of the remuneration systems in the audit of the financial statements according to Section 12 of the German Ordinance on the Audit of Financial Statements (Prüfberichtsverordnung, PrüfbV).

_{Published: August 2021}