Consultation on the German Investment Firm Remuneration Ordinance (WpIVergV) - Part II

On 19 October 2022, the German Federal Financial Supervisory Authority (BaFin) submitted a new and revised draft of an Investment Firm Remuneration Ordinance (WpIVergV) on the Investment Firm Act for consultation (Consultation 07/2022). BaFin already presented a consultation (Consultation 04/2021) of a WpIVergV in May/June 2021. The draft WpIVergV regulates requirements for the remuneration system of medium-sized investment firms and superordinate companies.

This article deals with adjustments and changes to the current consultation in relation to the original consultation version (Consultation 04/2021). An overview of the main features of the current consultation of the WpIVergV can be found in Part I of this article.

Legal development of the WpIVergV

The draft WpIVergV is based on the requirements of Directive (EU) 2019/2034 on the supervision of investment firms (IFD) and the guidelines developed by the European Banking Authority (EBA) (EBA/GL/2021/13) and thus implements European law. As BaFin received a large number of comments on Consultation 04/2021 and the EBA did not publish its guidelines setting out the requirements for the remuneration system of medium-sized investment firms until after the consultation was published, on 22 November 2021, BaFin has now put this revised version out for consultation.

Comments on the current draft may be submitted to BaFin until 21 November 2022. It is therefore not possible to say with certainty, at this point in time exactly when the WpIVergV will come into force. However, it is realistic to expect it to apply from spring 2023 at the earliest.

Changes to the 2022 draft regulation compared to the 2021 draft regulation

The original consultation version of the WpIVergV used the term employees and contained an enumerative list of which employees and activities have a material impact on the risk profile of the investment firm. The EBA had already issued regulatory technical standards (RTS) in this regard. Both the original and the revised consultation version of the WpIVergV refer to these. The enumerative list was criticized in various comments. This leads to inconsistencies, overlaps and possibly even contradictions, as it is not fully consistent with the RTS. It would be clearer and avoid contradictions to refer uniformly to the criteria listed in the RTS. BaFin has addressed this criticism and deleted the enumerative list in the revised consultation version without replacement. The terminology has also been revised. Instead of referring to employees, the revised consultation version of the WpIVergV now refers to risk takers. This term is now also defined in the WpIVergV.

In the original consultation version of the WpIVergV, the provision on the appropriateness of remuneration stipulated that the focus of remuneration had to be on fixed remuneration. As a result, BaFin had introduced a maximum upper limit for variable compensation of 1:1. This was an excessive impleentation of the requirements of the IFD. The IFD does not stipulate that the national supervisory authorities must set a maximum upper limit. BaFin has dispensed with this in the new version and deleted the passage without replacement. This is welcome, because in order to avoid risks, it makes more sense not to impose a uniform maximum ratio between variable and fixed components of remuneration on medium-sized investment firms. Instead, mid-sized investment firms should set an appropriate ratio themselves. In addition, this avoids regulation that goes beyond the EU requirements (so-called "gold plating"), which means that Germany does not lose its attractiveness as a financial centre compared to other locations.

It is also to be welcomed that BaFin has refrained from imposing a general disclosure obligation with regard to quantitative compensation information for all employees by business area. The provision on a general disclosure obligation from the original consultation version has been deleted without replacement and is no longer included in the revised version. A general disclosure obligation goes beyond the requirements of the IFD and would have meant significantly stricter requirements for Germany than the rules applicable abroad. An amendment was therefore necessary to safeguard Germany's attractiveness as a financial centre. In addition, there are also legal concerns about such a disclosure requirement, e.g. of a data protection nature. This contrasts with the regulations for large investment firms, as both the IVV and the KWG provide for a general disclosure obligation for them.

Also new are provisions on remuneration in connection with retirement benefits. The original consultation version of the WpIVergV did not provide for such regulations. Additional retirement benefits must be in line with the business strategy, objectives, values and long-term interests of the investment firm. In addition, the regulation also provides for exceptions with regard to variable compensation and additional retirement benefits.

In contrast to the original consultation version of the WpIVergV, the new consultation version of the WpIVergV also applies to superordinate companies. As a result of the amendment, a definition for superordinate companies and a specification of their scope of duties have been included. 

Conclusion

The revised consultation version of the WpIVergV, which has now been put out for consultation again, brings some minor (waiver of general disclosure requirements) and major innovations (such as the waiver of gold-plating of the appropriateness of the compensation arrangements). As previously indicated, these innovations range from changes in the terms used and the reintroduction of definitions and areas of responsibility, to more specifics in the system for the payment of variable compensation, to the deletion of individual provisions.

Our Finance & Financial Regulation team will keep you up to date on the further developments regarding the WpIVergV. If you have any questions regarding the concrete structuring of the remuneration system in your investment firm, we will be happy to advise you.

With the kind assistance of Christopher Schmieder, LL.M (Boston University) (research assistant), Bird & Bird Frankfurt am Main - Finance & Financial Regulation