Readjustment of remuneration systems under CRD V
Statutory provisions and outlook
Sound Compensation | New statutory provisions under CRD V – Implementation requirements in InstitutsVergV, inter alia regarding the risk taker analysis and the exemption limits for the variable remuneration of risk takers
1. Sound Compensation in Financial Institutions: Current status and background of the new regulations
The carousel of legal requirements for remuneration systems in financial institutions continues to rotate. A key driver is the European legislator, which last fundamentally revised the supervisory requirements for remuneration systems in Directive 2013/36/EU (CRD IV) and in EU Regulation 575/2013 (CRR). Among other things, CRD IV determines special remuneration requirements for employees with a particular influence on the institution's risk profile (so-called risk taker). CRD IV determined, among other things, that part of the variable remuneration shall be paid out over several years with a malus check before payment and partly in instruments (special risk taker rules). The CRD IV lays down a specific substantive principle of proportionality for its transposition by the EU Member States into their national law. In particular, the application of the rules relating to risk takers may be made dependent on the size of the institution, its internal organisation and the nature, scope and complexity of its business.
The German legislator, as part of the German Ordinance on Supervisory Requirements for the Remuneration Systems of Institutions (Institutsvergütungsverordnung – InstitusVergV), which was last revised on 25 July 2017, has chosen a quantitative approach for the implementation of this material principle of proportionality. Accordingly, only so-called significant institutions (whose core group comprises institutions with a balance sheet total of at least EUR 15 billion) have to identify risk takers and the special risk taker rules only apply to risk takers with a variable remuneration of more than EUR 50,000.00 p.a.
Individual EU member states applied comparable quantitative approaches, while other EU member states have so far pursued a qualitative approach in their implementation, according to which each institution must in principle identify risk takers and individual institutions can only deviate from the requirements for granting variable remuneration for risk takers in individual cases. This leads to a heterogeneous implementation of the principle of material proportionality throughout the EU.
The EU legislator now wants to harmonize this heterogeneous status with a unifying approach and has revised the remuneration regulations as part of the further development of CRD IV into CRD V and of CRR into CRR II.
The final versions of CRD V (2019/878) and CRR II (2019/876) were on 7 June 2019 published in the Office Journal of the European Union.
2. The new regulations in the CRD V: Readjustment of the material proportionality principle
CRD V now determines a quantitative principle of proportionality with a qualitative colouring: institutions that are not large institutions within the meaning of Art. 4 para. 145 lit. b) CRR II and whose balance sheet total over the last four years has averaged a maximum of EUR 5 billion (institution exemption limit) may, according to Art. 94 para. 3 CRD V, refrain from applying the special risk taker specifications for the variable remuneration of risk takers, which amounts to a maximum of EUR 50,000.00 and a maximum of 33.33% of the total remuneration (remuneration exemption limit).
EU Member States may set the Institute clearance limit at a lower value or increase it to a maximum of EUR 15 billion in relation to the balance sheet total. In the event of an increase in the Institute clearance limit, CRD V stipulates as special additional requirements that only institutions with a higher balance sheet total may make use of the material principle of proportionality, which comply with the simplified requirements for restructuring and settlement planning pursuant to Art. 4 of Directive 2014/59/EU and where the total value of the derivative positions in the trading book does not exceed 2% and the total value of all derivative positions does not exceed 5% of the balance sheet and off-balance sheet assets pursuant to Art. 4 para. 145 lit. e) CRR II.
In addition, the EU member states are supposed to be able to exempt individual groups of risk takers from the remuneration exemption limit if this is appropriate with regard to the specific function or responsibility or the remuneration system customary in the market.
CRD V concludes with two instructions to the EU Commission and the European Banking Authority (EBA) to act: The EU Commission, in close cooperation with the EBA, is to examine the effectiveness of the new provisions on the material principle of proportionality four years after the CRD V has come into force. The EBA shall incorporate the new rules into its Guidelines on Sound Remuneration.
3. The further steps in the legislative procedure
The new statutory provisions of CRD V and CRR II will enter into force on 27 June 2019. The EU Member States must transpose the new provisions of the CRD V into national law until 28 December 2020.
4. Outlook: Implementation of the CRD V in the InstitutsVergV
Due to the new provisions of the CRD V, the German legislator will have to adjust the InstitutsVergV in any case at least as the remuneration exemption limit for the variable remuneration of the risk takers are concerned and, to this end, set a binding relative upper limit for the variable remuneration of 33.33% of the total remuneration.
It remains to be seen how the legislator will deal with the institution exemption limit in accordance with CRD V. When making use of the regulatory leeway by setting an upper limit of EUR 15 billion, the legislator must take into account the special further requirements of CRD V for the institutions.
In addition, when revising the Institutional Proportionality Ordinance, it must be borne in mind that the CRD V does not extend the material proportionality principle to a possible waiver of the identification of risk takers - according to the CRD V, institutions must also identify risk takers when applying the material proportionality principle. The identification of the risk takers is necessary from a regulatory perspective, independent of the special risk taker rules on variable remuneration, in order to fulfil the obligations to disclose the remuneration systems laid down in Art. 450 CRR.
We would be pleased to inform you about the further course of the legislative process. Please do not hesitate to contact us with any questions you may have.