The legislature has made three attempts to reach the final target image of IVV 3.0. While the first draft version – among other things, with the obligation for all institutions to identify risk takers – led to the expectation of a comprehensive(r) modification of the regulatory requirements, in the final version of the IVV 3.0, the legislator has for the most part only cautiously further developed the regulatory requirements. In applying IVV 3.0, the EBA’s Guidelines on Sound Remuneration Policies of December 21, 2015, which have been applicable to remuneration systems since January 1, 2017, must be observed.
Back on track: Risk takers (only) in major institutions
Furthermore, only significant institutions have to identify risk takers. The balance sheet total of EUR 15 billion and the parameters for qualitative identification (Section 17 (2) IVV) continue to apply unchanged. The risk taker analysis is to be carried out according to the criteria of Regulation 604/2014. The practice must ensure comprehensive documentation and traceability of the analysis, especially when de-identifying employees who could be considered risk takers in view of their remuneration (Article 4 (2) of Regulation 604/2014).
What requirements do the clawback rules contain for Risk Takers?
The purpose of the clawback is to allow institutions to reclaim variable compensation already paid out to risk takers on an accrual basis in the event of negative performance contributions. In two groups of cases defined in IVV 3.0 (Section 18 (5) sentence 3), the clawback is to cover the entire variable compensation of the relevant period – whereby the statutory regulation comes up with vague legal terms (behavior of the risk taker leads to “significant” losses or “significant” regulatory sanctions, violation of regulations to a “serious extent”). Institutions must specify this indeterminacy in their malus system. The implementation of clawback is also challenging from an employment law perspective – individual agreements with individual risk takers are subject to statutory general terms and conditions control and here above all to the transparency requirement, which the German Federal Labor Court applies restrictively in its case law on the reduction of bonus payments. If the clawback is implemented in a collective agreement, the statutory equity requirements must be observed. It remains to be seen to what extent the practice will make use of cliff vesting as an alternative to clawback.
Fixed or variable compensation? – The change in perspective and its consequences for severance payments, among other things
From now on, “Everything that is not fixed is variable”. Institutions shall demonstrate and – on the basis of the criteria of § 2 para. 6 IVV – to document why the individual compensation component is fixed compensation. If proof cannot be provided, the compensation component is variable compensation and is subject to its stricter requirements, for example for its upper limit, which remains unchanged at a maximum of 200% of the fixed compensation.
In this context, severance payments are now generally to be variable compensation. Certain severance payments (including those resulting from a court settlement and other severance payments up to an amount of EUR 200,000.00 or a maximum of 200% of the last annual fixed compensation) are privileged under the regulations. It is unclear under the statutory provision whether a test of reduction for negative performance contributions must nevertheless be applied to these privileged severance payments. In future, institutions must generally document a framework concept for severance payments.
Compensation systems: More work and importance for the supervisory body and for the control units
The annual review of the compensation systems takes on a more important role: In the event of findings, institutions are required to draw up an action plan and document the remediation of the findings. In this context, the work and role of the supervisory body, and in significant institutions, the compensation officer, will also continue to grow in importance.
What is the final target picture in IVV 3.0 for disclosure?
The IVV 3.0 provides for a four-part regulation: (1) Significant institutions shall comply with the requirements of Art. 450 VO 575/2013 and Sec. 16 para. 1 IVV 3.0 must be observed; (2) non-significant institutions with total assets of more than EUR 3 billion must make a disclosure in accordance with Art. 450 of Regulation 575/2013 for the individual employee groups, (3) non-significant institutions with total assets of EUR 3 billion or less must make general disclosures on the relationship between fixed remuneration and variable remuneration and on the individual quantitative data in accordance with Art. 450 of Regulation 575/2013. Art. 450 par. 1 lit. (h) Regulation 575/2013, and (4) non-significant institutions that are not CRR institutions are not subject to disclosure requirements.
What are the requirements for group-wide compensation systems?
Significant institutions as superordinate entities shall apply the requirements for risk taker compensation systems to all group risk takers; at the same time, they may centralize the compensation officer function across the group. A group-wide compensation strategy must continue to be implemented, from which subordinate capital management companies may, however, be exempted. Moreover, superordinate companies shall, where appropriate, work towards the establishment of a compensation control committee in subordinate companies.
What other significant changes does the revised draft contain compared to the first draft?
Worth mentioning are:
The IVV 3.0 came into force on August 4, 2017. BaFin’s interpretative guidance is to be published before the end of 2017. We will provide comprehensive support for further regulatory developments and keep you informed of the latest developments. Please do not hesitate to contact us!
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