The Investment Firms Regulation (Regulation (EU) 2019/2033) (the IFR) and the Investment Firm Directive (Directive (EU) 2019/2034) (the IFD) established a prudential framework for investment firms that are authorised under the MiFID II Directive (2014/65/EU).
Amongst other things, the IFD contains provisions on governance and remuneration, including setting out requirements for remuneration policies, specific requirements with regards to variable remuneration and requirements for remuneration committees that are applicable to so-called “medium-sized” investment firms within the EU. These were implemented into German law by the German Investment Firms Act (Wertpapierinstutsgesetz – WpIG). Furthermore, the German legislator authorized the Federal Ministry of Finance, to draft more specific regulations on remuneration systems for German “medium-sized” investment firms. The Federal Ministry of Finance has delegated this power to the Federal Financial Supervisory Authority (BaFin), which has drafted an Investment Firm Remuneration Ordinance (Wertpapierinstuts-Vergütungsverordnung – WpIVergV) supplementing the provisions of the WpIG.1
A first-draft version of the WpIVergV was published for consultation in May/June 2021. The draft was revised based on the results from last year's consultation on a draft omnibus regulation to the WpIG and the "Guidelines on sound remuneration policies under Directive (EU) 2019/2034"2 of the European Banking Authority (EBA), which have been finalised in the meantime.
The WpIVergV applies to investment firms that do not fulfill the conditions of Article 12 (1) of the IFR (so-called "medium-sized” investment firms), and does not apply to small and non‐interconnected investment firms, as they are exempt from the requirements relating to remuneration. For "large” investment firms, the requirements of the German Banking Act (Kreditwesengesetz – KWG) and the Remuneration Ordinance for Credit Institutions (Institutsvergütungsverordnung -InstitutsVergV) continue to apply. This means that for “small-sized” investment firms, neither the WpIG nor the WpIVergV impose any requirements regarding remuneration. However, these investment firms are still subject to the remuneration rules of the German Securities Trading Act (Wertpapierhandelsgesetz - WpHG) deriving from MiFID as well as to the further detailed remuneration provisions from BaFin’s Minimum Requirements for Compliance (MaComp).3
The draft WpIVergV implements, in particular, Articles 30, 32 and 33 of the IFD. Accordingly, “medium-sized” investment firms must observe detailed requirements relating to remuneration, including those set out in Article 32 of the IFD, which set out specific conditions that must be satisfied when awarding and paying variable remuneration. The draft ordinance provides for specific rules regarding remuneration systems and stipulates as a principle that the remuneration strategy and system must be aimed at the achievement of objectives as implemented in the business and risk strategy of the investment firm. Furthermore, it defines criteria regarding the appropriateness of remuneration and remuneration systems.
The draft WpIVergV also includes several rules with respect to variable remuneration (bonuses). Besides the general requirement that the ratio between the fixed and variable remuneration must be defined by the investment firm in an appropriate manner, and that the investment firm must take into account its business activities and related risks, a number of specific quantitative constraints must be considered for the award and payment of variable compensation.
Furthermore, Article 33 of the IFD requires larger medium-sized investment firms to establish a remuneration committee. The IFD and WpIG set out the threshold amounts under which a “medium-sized” investment firm is considered a “larger” medium-sized investment firm. The draft WpIVergV establishes further tasks of the remuneration committee, in addition to those set out in the IFD.
The scope of application of this ordinance covers the investment firms’ directors (Geschäftsleiter) and risk takers. Risk takers are defined as all employees whose professional activities have a material impact on the risk profile of the investment firm or the assets it manages. According to the draft WpIVergV, it is the investment firm’s responsibility to identify its risk takers.
The consultation period ends on 21 November 2022 and the draft is expected to be adopted shortly thereafter.
Footnotes:
1) The official consultation documents are available (German language only) here.
2) The EBA Guidelines’ are available here.
3) Circular 5/2018 - Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency.
