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14.10.2021 | KPMG Law Insights

Amendment to the InstitutsVergV – Remuneration regulation in the focus of institutions

Shortly before the federal election, on 24 September 2021, the Third Ordinance Amending the Remuneration Ordinance for Institutions (“InstitutsVergV”) was published in the Federal Law Gazette. The amendments have been effective without a transition period since September 25, 2021. The changes affecting the compensation system are relevant for this year’s annual audit.

1. introduction
With the publication of the further amendments to the InstitutsVergV, the national legislator has further advanced the implementation of the European law requirements of the Capital Requirements Directive V “CRD V” and the Capitial Requirements Regulation II “CRR II” into national law. Most recently, the German Banking Act (Kreditwesengesetz – KWG) was amended by the Risk Reduction Act, which flanks the remuneration-specific provisions of the InstitutsVergV. Significant changes to the InstitutsVergV affect both significant and non-significant institutions.

2. does the principle of proportionality still apply?
The proportionality principle continues to find favor in the compensation system of institutions. The legislator continues to distinguish between significant and non-significant institutions. Since the Risk Reduction Act, the classification as a significant institution has been laid down in Section 1 para. 3c KWG n.F. located. The average observation period for the materiality threshold of EUR 15 billion has increased from three to four years. Counterevidence by means of a risk analysis is no longer possible. The previous strict division of requirements into significant and non-significant institutions is replaced by the new regulatory regime pursuant to Section 1 (1). 3 p. 2 InstitutsVergV n.F. extended. The national regulations were adapted to the European regulations, which provide for an average balance sheet total limit of EUR 5 billion (Art. 94 (3) CRD V). From now on, the special requirements for risk takers (including the performance assessment process, deferral, instruments) will predominantly apply to these non-significant institutions as well. The first indication of whether the criteria are met is provided by average total assets of at least EUR 5 billion in the last four completed financial years or, in the case of superordinate companies, total assets on a consolidated or partially consolidated basis of at least EUR 30 billion.

3. which companies are privileged?
In the future, the InstitutsVergV will no longer apply to companies that exclusively provide financial services. In particular, factoring and leasing companies will no longer fall within the scope of the InstitutsVergV in the future. The general requirements of the KWG, in particular the requirement for appropriate, transparent compensation systems geared to the sustainable development of the institution (section 25a (1) no. 6 KWG), continue to apply.
Promotional institutions have been granted privileges under the Risk Reduction Act with regard to their classification as significant institutions. Funding institutions are, in deviation from § 1 para. 3c KWG n.F. only significant from an average balance sheet total of EUR 70 billion (section 2 (9i) KWG n.F.).
There are further privileges for small and medium-sized securities institutions. Small and medium-sized securities institutions are not (any longer) subject to the rules of the KWG and the InstitutsVergV, but exclusively to the German Securities Institutions Act (WpIG) or the European Investment Firm Regulation (IFR). Large securities institutions with total assets of EUR 15 billion or more (Section 2 (15) WpIG) must continue to comply with the regulatory requirements of the KWG and the InstitutsVergV.

4. do all CRR institutions have risk takers to designate?
Yes, risk takers within the meaning of the InstitutsVergV are those defined in Section 1 (1) of the German Corporate Governance Code. 21 of the German Banking Act (KWG) n.F. and Section 25 a para. 5b p. 1 and 2 KWG n.F. Since the amendments to the Risk Reduction Act, not only significant institutions are required to conduct a risk analysis, but also all non-significant CRR institutions (so-called Risk Taker Light). However, the risk analysis for significant institutions is significantly more comprehensive due to the consideration of the qualitative and quantitative criteria of Delegated Regulation (EU) No. 604/2014 as amended.

5. What are the changes for non-significant CRR institutions?
Significant changes result on the one hand from the obligation to identify risk takers with the accompanying disclosure requirement, and on the other hand from the possible extended scope of application of the (significant) compensation requirements for risk takers. A non-significant institution with an average balance sheet total of at least EUR 5 billion should, in the short term, carry out a review of the scope of application pursuant to Section 1 para. 3 S. 2 InstitutsVergV n.F. and, where relevant, take the necessary measures with regard to the risk takers’ remuneration system.

6. has the exemption limit changed?
The provisions of § 18 para. 1 p. 3 InstitutsVergV n.F. was modified. For the purposes of exemption from the requirements of sections 20 and 22 of the InstitutsVergV, the variable remuneration may not exceed EUR 50,000 and, cumulatively, may not account for more than one third of the Risk Taker’s total annual remuneration.

7. has the retention period changed?
Yes, another innovation is the extended retention period pursuant to Sec. 20 para. 1 InstitutsVergV n.F., which was extended from three to four years and applies to at least 40% of the variable remuneration. A clarification was made pursuant to sec. 20 para. 2 InstitutsVergV n.F. with regard to the downstream management level of the Executive Board, which according to the wording only concerns the immediate downstream management level. Here, a retention period of at least five years is still required for 60% of the variable compensation.

8. do group requirements arise?
The InstitutsVergV sets out new requirements for the implementation of the Group-wide regulation of remuneration. The parent company of a group must define a group-wide compensation strategy that includes certain principles for, among other things, sustainable development and gender-neutral compensation. The requirements apply to the entire (supervisory) group without exception, and sectoral compensation systems of securities institutions or capital management companies must also be included.

9. what are the changes with regard to disclosure?
The regulatory requirements under Art. 450 CRR and Sec. 16 para. 2 InstitutsVergV n.F. are to be fulfilled by the publication of an annual disclosure report. In the future, all institutions must present at least the total amount of all compensation (broken down into fixed and variable) as well as the number of beneficiaries of variable compensation. The exception for institutions with total assets of less than EUR 3 billion was deleted by the legislator. The amendment to § 16 para. 2 InstitutsVergV n.F. takes into account the fact that, in accordance with section 1 (1) of the InstitutsVergV Section 21 KWG n.F. in conjunction with Section 25a para. 5b KWG n.F., all CRR institutions must have risk carriers.

10 What are the effects of the equal pay principle in the InstitutsVergV?
The appropriateness of the remuneration systems includes gender-neutral remuneration, so that the institution must exclude any disadvantage in remuneration on the grounds of gender for the same work or work of equal value. The requirements have been newly anchored in the InstitutsVergV, but similar prohibitions arise, among other things, from the KWG itself (Section 25d (5) sentence 2 KWG), from the Remuneration Transparency Act, and from the general principle of equal treatment. The inclusion of the requirement for gender-neutral compensation will mean that an annual review in the compensation report or in an appropriateness review must be carried out on a random basis in any case. Significant institutions have provided information on the gender pay gap to the supervisor pursuant to. § 24 para. 1a of the German Banking Act (KWG).

11. are there still privileged severance payments?
Severance payments continue to be variable remuneration within the meaning of the InstitutsVergV, but more severance payments may be privileged. The privileged severance payments extend not only to a social compensation plan within the meaning of the Works Constitution Act, but also to the Federal Employee Representation Act or the corresponding provisions of state agreements. From the point of view of labor law, this opens up room for maneuver. Supplementary explanations, e.g. on transitional payments and similar agreements, are expected in BaFin’s interpretative guidance.

12. did the duties to the compensation officers expand?
Yes, the scope of monitoring of the compensation officers was defined in accordance with section 24 para. 1 InstitutsVergV n.F. extended. For the first time, it was clarified that the KWG requirements, such as the upper limit or risk carrier identification, are also included in the scope of the audit. Additional duties to compensation officers may result from the interpretive guidance currently in draft form. The final publication of the interpretive guidance is expected no earlier than December 2021.

13. conclusion
Institutions should review the effects of the amendments to the InstitutsVergV before the annual audit and close existing gaps in the short term. The changes may have an impact not only on the Institute’s organizational policies, but also on employment contracts. Compensation regulation should continue to be closely monitored. The revision of BaFin’s interpretative guidance and the fourth regulation amending the InstitutsVergV have already been announced.

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