The amended Remuneration Regulation for Institutions entered into force on 25 September. The primary purpose of the revision was to transpose into German law the remuneration rules of the fifth EU Capital Requirements Directive (CRD V) that the German Risk Reduction Act (Risikoreduzierungsgesetz – RiG) had not already transposed into the German Banking Act (Kreditwesengesetz – KWG) (see info box). As well as the provisions of CRD V, it also contains several clarifications and editorial amendments. This article outlines the key changes.

BaFin put the third and fourth regulations amending the Remuneration Regulation for Institutions (Institutsvergütungsverordnung – InstitutsVergV) out for consultation in November 2020. The majority of the provisions implementing the remuneration requirements of CRD V are in the amending regulation that has now entered into force. The planned fourth amending regulation concerns only section 7 of the InstitutsVergV. This is in connection with the new section 10j of the KWG, which will govern the leverage ratio buffer requirement. The plan is for the fourth amending regulation to enter into force at the beginning of 2023.

Key changes

A key reform is to remove leasing and factoring firms from the scope of the Remuneration Regulation for Institutions (section 1 (1) sentence 2 of the InstitutsVergV). Furthermore, certain non-significant institutions that meet the criteria laid down in section 1 (3) sentence 2 of the InstitutsVergV are now required to apply specific requirements from the special section of the InstitutsVergV to the remuneration of their risk takers. These criteria are based primarily on Article 4(1) no. 145(c) to (e) of the EU Capital Requirements Regulation (CRR), which contains the definition of small and non-complex institutions. This extension was inevitable due to the requirements of Article 94(4)(a)(i) of CRD V.

General requirements

A new requirement for appropriate remuneration systems in accordance with section 5 (1) no. 6 of the InstitutsVergV is that these must now be gender neutral. There can be no gender-based pay discrimination for equal work or work of equal value. This is likewise a requirement of CRD V.

The disclosure requirement under section 16 of the InstitutsVergV was also modified to reflect the fact that all institutions are now required to identify risk takers. As a result, institutions that are not classified as significant in accordance with section 1 (3c) of the KWG are required to disclose quantitative information on the total remuneration of all employees in addition to the disclosures to be provided under Article 450 in conjunction with Articles 433b and 433c of the CRR. Institutions that in accordance with Article 433b(2) of the CRR are not required to disclose information under Article 450 of the CRR are likewise not subject to the disclosure requirements under section 16 of the InstitutsVergV.

Special requirements

Changes have also been made to the specific requirements of the Remuneration Regulation for Institutions. For example, the deferral periods for the variable remuneration paid to risk takers were increased to a minimum of four to five years from a minimum of three to four years (section 20 (1) of the InstitutsVergV). The deferral periods for management board members and management levels directly below them remain a minimum of five years.

Further amendments were made to the rules for groups of institutions. The new section 27 (1) sentence 1 of the InstitutsVergV requires that the group's parent undertaking establish a group-wide remuneration strategy. This includes determining principles for remuneration systems that are appropriate, transparent, gender neutral and geared to the group's long-term development. The remuneration strategy also applies to subordinated undertakings that are exempted from the specific remuneration provisions of the German Banking Act and the Remuneration Regulation for Institutions. Section 27 (2) of the InstitutsVergV stipulates that significant institutions and non-significant institutions subject to one of the specific requirements under section 1 (3) sentence 2 of the InstitutsVergV must also identify group risk takers and apply the remuneration requirements to them in the applicable scope.

CRD V specifies that subsidiaries within the prudential scope of consolidation which are subject to sector-specific remuneration requirements may be excluded from the specific remuneration provisions. This includes asset management companies, which to date in Germany had been exempted from applying the Remuneration Regulation for Institutions. Under the new version of section 27 (3) of the InstitutsVergV, all other subsidiaries with sector-specific requirements can now be excluded, as can subsidiaries domiciled in a third country that would fall under sector-specific law had they been established in the EU. To prevent institutions from transferring staff to such group entities in order to circumvent the Remuneration Regulation for Institutions, the new section 27 (4) of the InstitutsVergV prohibits exemptions from the remuneration requirements for staff whose professional activities have a material impact on the risk profile of an institution within the group.