Investment Firm Remuneration Ordinance The consultation draft of BaFin
The consultation draft of BaFin
BaFin has published on 4 May 2021 the draft of the Investment Firm Remuneration Ordinance (WVV-E). The draft is based on the provisions and the regulatory purposes of the Remuneration Ordinance for Institutions (IVV) (= monetary incentivisation of the individual employee's behaviour and risk management of the institution in line with the risk profile). At the same time, the WVV-E - in comparison to the IVV - provides for a large number of simplifications for the remuneration systems of medium-sized investment firms. In this Client Alert, we summarise the main provisions of the WVV-E.
The Investment Firm Remuneration Ordinance (Wertpapierinstituts-Vergütungsverordnung, WVV) is 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 EU Regulation 2019/2033 (IFR) and in Directive 2019/34/EU (IFD) (see link). In parallel, the European Bank Authority (EBA) is currently consulting on its draft Guidelines on Sound Remuneration Policies dated 17 December 2020. The EBA also submitted the final draft of the Regulatory Technical Standards on the definition of employees who have a material impact on the risk profile for the investment firm (identified staff) to the EU Commission on 21 January 2021.
The German legislator has to implement the IFD's requirements on remuneration systems into domestic law by 26 June 2021 (Art. 67 (1) IFD). On 26 April 2021, the German Bundestag passed the Securities Institutions Act (WpIG), which was promulgated in the Federal Law Gazette on 17 May 2021, and which contains regulations on the remuneration systems of investment firms and an ordinance authorisation in Sec. 46 WpIG. The WVV completes the new regulations.
1. The WVV in the (in future differentiated) regulatory regime for the remuneration systems of investment firms - maxim of the proportionality principle
With the revised requirements, the legislator partially decouples the remuneration systems of investment firms from the previously generally applicable regulatory regime for the remuneration systems of institutions.
The modification of the regulatory framework is carried out with the maxim of the regulatory proportionality principle, which for many investment firms, in view of the lack of deposit business, allows in part less stringent requirements for the content of the remuneration systems.
The revised supervisory remuneration regime contains a three-part regulatory system: Remuneration systems of large investment firms (Art. 1 (2) IFR, Sec. 2 (18) WpIG) continue to be subject to the requirements for the remuneration systems of institutions, i.e. essentially to the provisions of the IVV and the German Banking Act. Remuneration systems of small investment firms (Art. 12 (1) IFR, Sec. 2 (16) WpIG) will in future be subject solely to the requirements of Delegated Regulation 2017/565/EU and MaComp.
The WVV and the other revised statutory remuneration regulations cover medium-sized investment firms, i.e. investment firms that do not fulfil at least one of the criteria relevant for the qualification as a small investment firm in Art. 12 (1) IFR (Sec. 2 (17) WpIG; i.e. engage in proprietary trading, have a total balance sheet and off-balance sheet of more than EUR 100 million or have Assets Under Management (AUM) of more than EUR 1.2 billion).
2. Regulatory proportionality principle and personal scope of application of the WVV
The maxim of the regulatory proportionality principle (already) determines the personal scope of application of the WVV: The WVV (only) covers the remuneration systems of the persons listed in Sec. 1 (1) s. 1 WVV-E, i.e. the employees identified as "identified staff”, including the managing directors, the employees of the subordinate management level, the employees identified as risk takers, the employees of the control units and the employees whose total remuneration corresponds at least to the lowest total remuneration of an employee of the subordinate management level or a risk taker. All other employees of the investment firm are not covered by the WVV.
In addition to employees in an employment with the investment firm, the aforementioned groups of persons also include external persons who fulfil the requirements of Sec. 2 (7) WVV-E (external employees). The demarcation of external employees pursuant to Sec. 2 (7) WVV-E from other external persons who work for the investment firm can be based on the demarcation criteria developed in practice for institutions pursuant to Sec. 2 (7) IVV. The further legislative process will have to clarify the content of the case group of "ancillary business" of the investment firms (Sec. 2 (7) s. 1 no. 1 WVV-E), which the IVV (also in the current draft of its revised version) does not provide for as an activity justifying the status of external employee pursuant to Sec. 2 (7) IVV.
All other employees of the investment firm are not covered by the WVV. For the remuneration systems in medium-sized investment firms, the WVV does not continue the systematics of the IVV with the general regulations for the remuneration of all employees and with the special regulations for the remuneration of risk takers (in significant institutions). These employees are to be treated like employees of small investment firms.
3. General requirements for the remuneration system - IVV aligned - with open questions for further legislative procedure
The legislator applies the regulatory proportionality principle also in the general requirements for remuneration systems. As a guiding principle, it stipulates that the remuneration system must be adapted to the size, the internal organisation and the type as well as the scope and complexity of the investment firm’s business activities (Sec. 5 (1) no. 1 WVV-E).
Investment firms may determine the appropriate upper limit for the ratio between fixed remuneration and variable remuneration according to need.
Compared to the provisions of the IVV, this guideline opens up to medium-sized investment firms, among other things, a more flexible regulation in the determination of the upper limit for the ratio between the fixed remuneration and the variable remuneration, which the legislator has not - as in Sec. 25a (5) s. 2 and 5 KWG for the institutions - provided with a quantitative upper limit, but for which it determines an amount for the investment firm tailored to its own risk profile (Sec. 6 (1) s. 1 WVV-E). In practice, upper limits of more than 200% are likely to be permissible in individual cases.
At the same time, it is noticeable that the WVV-E does not contain individual legal principles of the IVV on the privileged supervisory treatment of the relevant remuneration components; specifically:
- on the treatment of the function allowance as fixed remuneration, which institutions may treat as fixed remuneration under the conditions of Sec. 2 (6) s. 3 and 4 IVV, and for which Sec. 2 (6) WVV-E does not provide for comparable regulations, although the EBA Guidelines-E (para. 129) considers such a comparable regulation to be permissible.
- on the possible non-consideration of a guaranteed variable remuneration in the calculation of the ratio between fixed and variable remuneration in case they are agreed on in writing prior to admission of the employee's activity, as stipulated by the regulation of Sec. 5 (5) s. 3 IVV for institutions.
It remains to be seen whether the legislator will make modifications in the further legislative procedure. If no modifications are made, medium-sized investment firms could implement the guaranteed variable remuneration in their remuneration system according to their needs by determining a separate upper value limit for it pursuant to Sec. 6 (1) s. 1 WVV.
4. Special requirements for variable remuneration
The special regulations for variable remuneration contained in Sec. 6 (2) WVV-E follow in principle the requirements of Sec. 19 et. IVV for the variable remuneration of employees identified as risk takers in significant institutions; with the following deviations:
The legislator allows medium-sized investment firm to make us of design autonomy for the content of the performance parameters for variable remuneration.
- Performance parameters are the individual performance of the employee, the performance of the relevant organisational unit and the overall result of the investment firm (Sec. 6 (2) no. 1 WVV-E), whereby financial and non-financial performance parameters are to be taken into account (Sec. 6 (2) no. 2 WVV-E). For the institution-related performance parameter, the legislator deviates from the terminology used in Sec. 19 (1) s. 2 IVV (overall performance); in terms of content, the different terminology should have no relevance for the selection of suitable institution-related performance parameters (= all risk-adjusted performance-related target figures). The performance assessment has to be based on a multi-year assessment period (Sec. 6 (2) no. 3 WVV-E), whereby the WVV-E does not include the minimum periods specified in Sec. 19 (1) s. 2 and 3 IVV for the performance assessment. Investment firms can exercise the associated design autonomy on the basis of the regulatory proportionality principle on the basis of their own risk profile. Moreover, for the determination of the performance parameters related to the individual performance of the employee, the legislator does not require the determination of the remuneration parameters in such a way that the degree of target achievement can be determined, as is required in the case of significant institutions of Sec. 19 (2) s. 2 IVV. The conclusion of target agreements (at least for the individual performance of the employee) is not a prerequisite in Sec. 6 (2) nos. 1 to 3 WVV-E - in contrast to Sec. 19 (2) s. 1 IVV; in practice it will be common practice at the same time.
- The WVV-E does not contain any special provisions - comparable to Sec. 10 IVV - on the variable remuneration of the Management Board.
- The remuneration system shall also provide for malus and clawback provisions in the event that the employee can no longer be considered competent and reliable for the activity he/she performs (Sec. 6 (2) no. 4 WVV-E). The malus and clawback review is limited to any negative performance contributions; it does not refer to any subsequently determined negative deviations from the original target result.
- Medium-sized investment firms that meet the criteria of Sec. 44 (3) s. 2 WpIG (= total on-balance sheet and off-balance sheet assets on average of the last four preceding business years less than EUR 100 million/300 million and fulfilment of the further criteria determined in Sec. 44 (3) s. 2 WpIG) generally do not need to observe the requirements for the retention of part of the variable remuneration and the instrument-based remuneration component for the variable remuneration of their employees (Sec. 6 (6) WVV-E), whereby BaFin may impose the application of the requirements on such investment firms in individual cases (= as an "exception to the exception") if this is required due to the type and scope of the securities institution's activities, its internal organisation or the characteristics of the group to which the investment firm belongs.
5. Remuneration governance requirements
In general, only investment firms that do not meet the requirements of Sec. 44 (3) s. 2 WpIG have to establish a remuneration control committee.
The annual review of the remuneration systems is generally to be carried out by an internal control officer. Any deficiencies identified in the review are to be corrected promptly (Sec. 10 (2) WVV-E), with the legislator stating in the explanatory memorandum to the draft the expectation that any deficiencies identified are to be corrected within 30 days.
The provisions of the WVV-E on the documentation of the remuneration systems in an organisational guideline (Sec. 9 WVV-E), on informing employees about the remuneration systems (Sec. 11 WVV-E) and on the prohibition of hedging (Sec. 8 WVV-E) are largely congruent with the provisions of the IVV.
Medium-sized investment firms can use the guidelines established in remuneration practice (e.g. for informing employees about the specific performance parameters of the variable remuneration within the first three months of the respective reference period) for this purpose.
6. Implementation into the remuneration systems
The WVV is to enter into force on 26 June 2021. The WVV-E explicitly does not specify a transitional period for the implementation of the requirements from the WVV into the remuneration systems. In the EBA Guidelines-E, the EBA articulates the expectation that the EBA Guidelines are to be implemented into the remuneration systems of medium-sized investment firms by 31 December 2021 and to be applied for the first time to the reference periods starting after 31 December 2021. Medium-sized investment firms can also book this planning horizon for the general implementation of the supervisory requirements of the WVV into their remuneration systems in their planning.
Outlook: Finalisation expected before the end of June 2021
The legislative procedure is expected to be completed in June 2021. We are monitoring the further development of the legislation process.
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