The consultation draft for the new version of the Remuneration Ordinance for Institutions (IVV 4.0), published on November 12, 2020, in connection with the pending changes of the German Banking Act (KWG), currently preoccupies HR managers in financial institutions. hkp.com talks with the industry experts and hkp// group partners Isabel Jahn and Petra Knab-Hägele about the upcoming changes and their effects.
Ms. Jahn, Ms. Knab-Hägele, you have studied the intended changes of IVV 4.0. What do German institutions need to prepare for?
Isabel Jahn: Allow me to first look at the current IVV consultation draft within a wider context. A number of regulatory adjustments and changes affecting remuneration were introduced in 2020. Those were triggered by the EU Bank Directive with stricter requirements imposed by the Capital Requirements Regulation (CRR II) and the Capital Requirements Directive (CRD V). Both are aimed at mitigating risks of the financial sector and strengthening its resilience and stability, also in anticipation of future crises.
And IVV 4.0 is the national implementation of these changes.
Isabel Jahn: Exactly. In particular, the provisions of CRD V must be implemented in national law by amending the German Banking Act (KWG) and - for the remuneration-relevant provisions - also by amending the Remuneration Ordinance for Institutions.
Petra Knab-Hägele: This does not, however, mean that the scope of regulatory requirements is exhausted. As a result, the Regulatory Technical Standards (RTS) for the risk taker identification and the Guidelines on Sound Remuneration Policies were amended this year in addition to the above-mentioned EU changes. While the RTS is directly implemented in EU member states, the Guidelines on Sound Remuneration are the framework for national implementation. In Germany, the guidelines are implemented as part of the Remuneration Ordinance for Institutions.
Isabel Jahn: In addition, new rules for the remuneration policy of investment firms will come into force soon. The Investment Firms Act is in the consultation process, which adopts the EU requirements of the Investment Firms Directive IFD. It must be implemented into national law by June 26, 2021. Smaller investment firms will be subject to the new, simplified requirements, while larger firms will continue to be subject to the requirements of the KWG and the Remuneration Ordinance for Institutions.
How extensive will the changes made by the new IVV be, especially for those institutions regulated under the KWG?
Petra Knab-Hägele: The consultation draft suggests that, as expected, the intended changes will not be as radical as in the latest draft of the Remuneration Ordinance for Institutions. But there are a number of amendments, which particularly affect smaller, non-significant institutions as well as larger superordinate companies, investment management companies and securities service providers.
Isabel Jahn: This will require that all CRR institutions identify risk takers at executive, supervisory and subordinate management level, as well as in other selected management functions and for employees with a remuneration of EUR 500,000 or more.
However, it was previously announced that the principle of proportionality would be upheld? Is the differentiation between significant and non-significant institutions retained along with the respective different requirements?
Petra Knab-Hägele: The classification into significant and non-significant institutions, and consequently the principle of proportionality, remains unaffected. Non-significant institutions, in general those with a balance sheet total of less than EUR 15 billion, must now also identify their risk takers, but they are still not required to apply the strict requirements regarding the remuneration structure as significant institutions do.
This means that smaller institutions are exempt from the broad-ranging requirements that apply specifically to variable remuneration?
Petra Knab-Hägele: Yes and no. The devil is in the detail, as always. In addition to the major CRR institutions, two other groups will be affected by key aspects of the more comprehensive requirements regarding remuneration, namely smaller, non-significant CRR institutions with a balance sheet total of more than EUR 5 billion and not marginal trading activities or high derivative positions, as well as superordinate companies, which are not considered CRR institutions but have a balance sheet total of more than EUR 30 billion. They will have to regulate aspects such as target definition and performance appraisal, remuneration deferral, clawbacks to reclaim remuneration and payment in instruments such as shares, etc.
This essentially results in a new group of institutions...
Petra Knab-Hägele: Yes, namely those with a balance sheet total of between EUR 5 and 15 billion, which will need to look more closely at the requirements. In particular, capital market-oriented institutions will have to carry out a more detailed review.
Isabel Jahn: And investment management companies and securities service providers now also have to implement the provisions laid down in the ordinance explicitly for employees identified as group risk takers within the group context, i.e. with significant parent institutions.
But for the significant institutions nothing will change?
Petra Knab-Hägele: The necessary amendments are definitely not revolutionary, especially for the significant institutions. But they are not completely exempt. They will have to examine the new requirements from the Regulatory Technical Standards RTS for the identification of risk takers and implement changes according to their specific organizational model.
Isabel Jahn: More action is required for variable remuneration. The special requirements for risk takers still only apply for amounts above EUR 50,000. But there is a new restriction. If the variable remuneration represents more than a third of the total annual remuneration, the stricter rules apply even below the EUR 50,000 threshold. This also means that major institutions will have to carry out the corresponding tests and adjustments. And because the deferral periods for risk takers will be increased from at least three to four years, some institutions will also have to change internal guidelines and contracts with the stakeholders.
The consultation draft refers for the first time to maintaining gender neutrality with regard to remuneration. How do you interpret this requirement?
Isabel Jahn: This is not entirely surprising. In future, KWG will also require significant institutions to publish information on gender-specific differences, i.e. the gender pay gap.
It is a current issue!
Isabel Jahn: Of course. The aim is to avoid disadvantages based on gender in terms of pay. Future auditing will show how this audit will be carried out in addition to the disclosure obligations under KWG provisions. It will always be an advantage for companies to be able to present a remuneration system that includes gender-neutral definitions, for example on the basis of a job evaluation / grading system.
Petra Knab-Hägele: In principle, the institutions must be able to prove that they have a remuneration system that is non-discriminatory in all respects. This is because, apart from the specific demand of the consultation draft, it is generally not only a question of gender neutrality.
What is the next step in the implementation process? Can the responsible parties in the institutions prepare themselves for the implementation of the new regulations?
Petra Knab-Hägele: We expect the final regulations to be issued at the end of this year or early 2021 in accordance with the announcements by BaFin. Thus, all information is for the moment based on consultation drafts, but it is not expected that there will be significant changes for the final versions.
Isabel Jahn: Irrespective of the need for change, the affected institutions ought to use the time remaining until the final draft is published and prepare the necessary measures, at least from a conceptual point of view. For example, it might be possible to check what gaps exist in the company's own remuneration system when compared with the new regulations.
Petra Knab-Hägele: … and the bodies and control functions concerned can at least be made aware in advance of what changes are required. That would make further action easier. Also, non-discriminatory remuneration is an issue that generally needs to be addressed as soon as possible, if corresponding mechanisms have not yet been established. IVV 4.0 only serves as an added incentive.
Ms. Knab-Hägele, Ms. Jahn, many thanks for this interview.