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Compensation standards for credit institutions and financial services providers in Germany
Practical Law UK Legal Update 9-501-3489 (Approx. 3 pages)
Compensation standards for credit institutions and financial services providers in Germany
by Reinhard Bunjes and Jochen Kindermann, Simmons & Simmons
| Published on 26 Jan 2010 • Germany |
This article is part of the PLC Global Finance January 2010 e-mail update for Germany.
Speedread
Following the FSB's development of the Principles of Sound Compensation Packages during the course of the G20 summit in 2009, on 21 December 2009, BaFin published its Circular 22/2009 concerning regulatory requirements for compensation systems of credit institutions and financial services providers. This serves as basis for the draft bill relating to the regulatory requirements for compensation schemes of credit institutions and insurance companies issued by the German Ministry of Finance on 15 January 2010.
The Circular
Following development by the Financial Stability Board (FSB) of the Principles of Sound Compensation Packages (Principles) during the course of the G20 summit in 2009, on 21 December 2009, the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) published its Circular 22/2009 concerning regulatory requirements for compensation systems of credit institutions (Kreditinstitute) and financial services providers (Finanzdienstleistungsinstitute) (Circular).
The provisions of the Circular apply to credit institutions and financial services providers as defined in section 1(1b) of the German Banking Act (Kreditwesengesetz) (KWG) and branch offices of non-EEA domiciled institutions that conduct banking business or provide financial services in Germany (section 53(1,) KWG) – collectively, the "relevant institutions". The requirements stipulated in the Circular apply to the entire group of companies and as such the Circular may be applicable worldwide in some cases.
The Circular stipulates requirements in respect of the organisation of remuneration paid to certain employees and members of governing bodies and takes a "risk based approach" which is mostly consistent with the previously issued minimum requirements for risk management (Mindestanforderungen an das Risikomanagement) (MaRisk) published 14 August 2009. Above all, the provisions set out in the Circular are aimed at creating a system of effective risk management and so preventing a relevant institution from creating compensation systems that expose it to disproportionately higher risks. This includes:
- Compensation schemes for staff engaged in finance and risk controlling may not be based on the same parameters as the compensation schemes controlled by these persons as any such parallel parameters may result in conflicts of interest.
- Moreover, the Circular requires significant relevant institutions to place greater emphasis on variable compensation paid to senior executives (including members of the management) and other employees whose actions have a material impact on the risk exposure of the relevant institution (that is, individuals who, as a result of their seniority, authority to sign on behalf of the relevant institution and/or nature of their occupation, are able to expose a relevant institution to high risk, such as securities dealers, investment bankers and so on (risk-takers)).In respect of risk-takers, the significant relevant institution must ensure that the compensation system for those persons is designed such that:
- while maintaining a variable compensation component as an effective incentive mechanism, it is ensured that the proportion between fixed and variable compensation is reasonable;
- guaranteed variable compensation components are only allowed during the first year of employment;
- variable compensation components are not just dependent on the risk-taker's individual success, but also on the overall success of the significant relevant institution;
- depending on the risk-taker's position and its assigned tasks within the relevant institution, at least 50% of the variable compensation must be tied into the sustainable growth of the significant relevant institution (for example by including stock compensation);
- depending on the risk-taker's position and their assigned tasks within the relevant institution, at least 40% of the variable compensation may only be paid out over a period of three years, with actual payment depending on the sustainability of the risk-taker's contribution to the significant relevant institution's success;
- negative contributions to success (penalties) become relevant and so, in certain circumstances, result in variable compensation components being cut altogether.
- Compensation schemes for significant relevant institutions must be put under the supervision of a compensation committee which will supervise the design and development of the schemes, identify deficiencies of the schemes and keep management updated on the scheme's performance.
The Draft Bill
On 15 January 2010, the German Ministry of Finance (Bundesministerium der Finanzen) issued a draft bill relating to the regulatory requirements for compensation schemes of credit institutions and insurance companies (Draft Bill). In line with BaFin's expectations that the Circular will not differ materially from the ultimate parliamentary act implementing the FSB Principles, the Draft Bill follows the provisions of the Circular while adding the following two propositions:
- BaFin will be authorised, in part or in whole, to prohibit the payment of variable compensation components where the relevant institution's equity capital (Eigenmittel) or liquidity (Liquidität) is insufficient.
- BaFin will further be authorized to take measures pursuant to section 45b KWG against the relevant institution; namely, require the affected relevant institution to increase its equity capital and/or to make amendments to the compensation scheme.