Regulatory Framework

Regulation and supervision of financial institutions and insurance companies has increased worldwide since the financial and economic crisis in 2008/09. Financial institutions, in particular, are now subject to the rules of the Basel Committee on Banking Supervision, which was set up in response to the crisis. These rules have already been revised twice since then. Basel II, and its Basel II.5 update, were still mainly concerned with capital adequacy requirements. Since Basel III however, global liquidity standards are planned to supplement the earlier mainstays.

The Basel III rules have been enacted in the Member States of the European Union by means of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR). In addition to the CRD and CRR, the European Union has also introduces more specific rules for certain institutions in the financial sector. For instance, the Alternative Investment Fund Manager Directive (AIFMD ) and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) places particular regulatory requirements on asset managers.

Remuneration in the relevant institutions plays a major role in these Directives. One example for German banks is the Bank Remuneration Regulation (InstitutsVergV), which includes specific provisions for remuneration of chief executives, risk bearers, non-risk bearers and monitoring units. The „Guidelines on Sound Remuneration Policies under the AIFMD“ includes similar, but less stringent, provisions for asset managers.

Insurance companies are also subject to specific requirement, mainly contained within the Europe-wide solvency regulations. Only a handful of insurance companies are still subject to the German Insurance Remuneration Regulation (VersVergV).

The various regulatory requirements pose a variety of questions for regulated companies with regard to their remuneration systems, e.g:

• Which elements are to be included in the total remuneration package? What should be the ratio between these elements?
• Are there any special structuring options and restrictions for particular groups of employees, such as risk bearers?
• How can variable remuneration provide targeted incentives and also include any risks being taken?
• How can, or must, employees’ performance be measured.
• What must be included in the reports to internal bodies and external authorities?
• What are the conditions under which companies are able to pay variable remuneration?

hkp/// group helps companies in the financial industry to find answers to these and other questions, and also with operationalizing the regulatory requirements within their remuneration systems. Our experienced experts come with a wealth of knowledge both from their work on consulting projects and extensive operational experience as personnel managers in relevant businesses.