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German Remuneration Ordinance for Institutions 2.0 – the key changes

Update Banking & Finance 12/2017 - Regulatory

The German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung – “IVV”) has been amended again in light of the EBA Guidelines (EBA/GL/2015/22) on sound remuneration policies. The amended version of the IVV came into force on 4 August 2017.

Who is affected?

There have been no changes to the scope of the IVV. Accordingly, banks and financial services institutions pursuant to the German Banking Act (Kreditwesengesetz – "KWG") are subject to the new rules. Thereby, the IVV differentiates between important and not-important institutions on the basis of the balance sheet total (threshold 15 billion Euro). Important institutions have to comply with additional, higher requirements according to §§ 17 ss. IVV.

What are the most important changes?

  • The requirements around the remuneration systems of institutions have been changed: these must now be “appropriate” within the meaning of §§ 3 ss. IVV. This is accompanied by a new regulation of documentation obligations. The remuneration system must be aligned with the institutional strategy and laid down in the organisational guidelines of the Institute.This leads into another important requirement under the IVV. The institution must work towards amending any existing contracts with staff, private or public sector works agreements and company practices that are not compatible with the IVV, as far as is legally permissible. It is therefore essential to carry out a legal review of existing contracts.
  • Special changes have also been made to the requirements for major institutions. They must identify risk takers within the institution who are affected by a large number of regulatory requirements. For example, negative profit contributions must reduce the amount of variable remuneration or lead to a complete loss of it. If the variable remuneration of a risk taker exceeds the threshold value of EUR 50,000, further requirements must be met. In particular, the IVV regulates the remuneration components and standardises that their payment must be extended over a retention period. In the event of serious mistake of a risk taker, a remuneration already paid out must be reclaimed (clawback). During the retention period, an ex-post risk adjustment must also be carried out to determine whether the agreed variable remuneration is to be reduced. Risk-adjustment and clawback are thus at the key changes of the new regulations.
  • Of critical importance here is that all the changes are based on a new definition of remuneration. The key message is: every financial performance is a remuneration. Under the new concept of remuneration, variable remuneration is defined as anything that is not a fixed remuneration. In particular, the new concept of remuneration also applies to severance payments. There are no more exceptions.

What are the consequences of failure to comply?

In the event of non-compliance with the IVV, the institute does not have a proper business organisation within the meaning of § 25a KWG. The law provides for a number of sanctions that are tailored to the offence in question. According to § 3 IVV, the managers of the institute are responsible for the breach. In the event of a breach, the offending manager may be revoked by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – "BaFin") and BaFin may intervene in its variable remuneration. Special audits and fines by BaFin are also threatened. Therefore, a detailed examination of the respective remuneration system is necessary in order to be able to meet the requirements of the IVV.

Is there a need for action for the concerned institutions?

The amended version of the IVV entered into force on 4 August 2017, various important regulations already became applicable. Especially, the requirements regarding individual contracts and the obligation to adjust also existing contracts give rise to an urgent need for action against the background of the far-reaching changes in the area of institution remuneration.


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Authors

Andrea München
Andrea München, LL. M. (Université du Luxembourg)
Partner
Frankfurt