Bonus Cap & Co. revision of remuneration in the banking sector

Transcription

1 Bonus Cap & Co. revision of remuneration in the banking sector Regulatory: Harald Glander Jochen Kindermann Employment: Hans-Hermann Aldenhoff Verena Braeckeler-Kogel London, 27 February 2014

2 Remuneration regime in Germany 1. Institutions German Banking Act (KWG) German Remuneration Regulation for Institutions (InstitutsVergV) Investment managers Insurance companies German Capital Investment Code (KAGB) Regulation on Remuneration (yet to come) German Insurance Supervision Act (VAG) German Insurance Remuneration Regulation (VersVergV) 2. Firms providing investment services: German Securities Trading Act (WpHG) German Minimum Requirements for Compliance, CoB, Organisation (MaComp) 1 / L_LIVE_EMEA2: v1

3 What rules do apply? Entity/Group BaFin regulated institution? no German rules do not apply InstitutsVergV applies (s.1-16) Significant institution? yes no yes Stricter requirements of InstitutsVergV apply Licensed to provide investment services? yes Employee provides investment services? no yes MaComp rules apply German MaComp rules do not apply 2 / L_LIVE_EMEA2: v1

4 What (new) regulatory rules are there? CEBS Guidelines on Remuneration Policies and Practices of 10/12/2010 German Banking Act (KWG) German CRD IV Implementation Act CRD IV 2013/36/EU CRR 2013/575 EBA RTS/2013/11 of 16/12/2013 risk taker German Remuneration Regulation for Institutions German Minimum Compliance Requirements (MaComp) 3 / L_LIVE_EMEA2: v1

5 German Remuneration Regulation for Institutions ( Remuneration Regulation ) main issues Scope of application: all German institutions, all employees not applicable to branch offices of foreign institutions For all institutions Definitions: term compensation (unchanged) Review of appropriateness of remuneration (unchanged) Bonus cap (new) Remuneration supervisory committee (new) Information to employees and modification of existing agreements 4 / L_LIVE_EMEA2: v1

6 Classification as significant institution (s. 17 Remuneration Regulation) Up to now Rebuttable presumption from average total assets of EUR 40 billion (3-year period) Independent risk analysis from average total assets of EUR 10 billion New Rebuttable presumption from average total assets of EUR 15 billion (3-year period) Regulator BaFin can classify institution under this threshold as significant (criteria: remuneration structure ( high share of variable compensation); nature, scope, complexity, risk content and internationality of business) also covers other group institutions Institutions falling under supervision of ECB Institutions posing a potential threat to the system Financial trading institutions 5 / L_LIVE_EMEA2: v1

7 Remuneration Regulation main issues Mandatory deferral (40 or 60 per cent) from EUR 50k variable remuneration for risk takers NEW: identification of risk takers according to EBA guidelines (stricter rules) BaFin s complaints published January 2014 Significant institutions (1) Remuneration other than cash participation in long-term performance of institution at least 50 per cent of variable remuneration 6 / L_LIVE_EMEA2: v1

8 Remuneration Regulation main issues Risk takers Staff whose activities have a material impact on the overall risk profile Based on regulatory standards of EBA, including in particular quantitative criteria, e.g.: total remuneration >EUR 500k/preceding year 0.3% of staff with highest remuneration/preceding year total remuneration lowest remuneration of senior management or management level below them in preceding year NEW: BaFin can identify risk takers itself and issue a corresponding order to institution Significant institutions (2) 7 / L_LIVE_EMEA2: v1

9 Remuneration Regulation main issues Group responsibility Group-wide remuneration strategy Does not apply to insurance companies and investment managers Powers to intervene in relation to subsidiaries? Who belongs to group: identification Significant institutions (3) 8 / L_LIVE_EMEA2: v1

10 Requirements for supervisory committees and management Remuneration supervisory committee Committee of supervisory or management body to be set up by all institutions exception: less than ten members on supervisory board and not a significant institution higher ranking than remuneration committee under old Remuneration Regulation Tasks ensures remuneration systems are appropriately structured prepares resolutions Significant institutions (4) 9 / L_LIVE_EMEA2: v1

11 Requirements for supervisory committees and management Remuneration officers New function who should it be? (not the compliance officer) Duties and prerequisites Where should it fit into the organisation? Appointed for 24 months, prohibition of discrimination Special protection against dismissal with 12 months extended effect Significant institutions (5) 10 / L_LIVE_EMEA2: v1

12 Scope of application of Minimum Compliance Requirements Relationship of Remuneration Regulation for Institutions ( Remuneration Regulation ), Insurance Remuneration Regulation and Investment Code (Regulation) to Minimum Compliance Requirements Do German Banking Act/Remuneration Regulation apply? Do Securities Trading Act/Minimum Compliance Requirements apply? Conflict between Minimum Compliance Requirements and Remuneration Regulation? Not governed in Remuneration Regulation but in Minimum Compliance Requirements? Minimum Compliance Requirements are subsidiary Minimum Compliance Requirements to be taken into account 11 / L_LIVE_EMEA2: v1

13 Scope of application of Minimum Compliance Requirements Services-related distinction Remuneration Regulation for Institutions Minimum Compliance Requirements Investment Code/ Regulation Services under Banking Act, excluding investment services Investment services Services under Investment Code 12 / L_LIVE_EMEA2: v1

14 Scope of application - persons covered German Banking Act / Remuneration Regulation for Institutions Employees engaged by their institutions for banking and financial services (employment, agency or service contracts) Outsourcing companies part of the same groups Not an employee: sales representative German Securities Trading Act / Remuneration Regulation for Institutions Persons able to exert a material impact on the investment services or non-core investment services rendered or the conduct of the investment services enterprise Employees in sales with contact to customers Field employees Tied agents Other employees involved in the investment services Employees with a control function in connection with investment services Employees able to exert pressure on sales employees Other employees depending on field of work Financial analysts if they produce financial analyses for sales dept. 13 / L_LIVE_EMEA2: v1 German Investment Code / Regulation Managers Risk takers Employees with a control function Employees who receive total remuneration based on which they would be in the same income bracket as senior managers and risk takers

15 Setting up a remuneration system according to the Securities Trading Act/Minimum Compliance Requirements Setting up a remuneration system that does not adversely affect clients interests in the short, medium or long term System to be set down in writing and reviewed on regular basis Criteria for performance assessment to be documented and disclosed to employees New products and services to be checked for compatibility with remuneration system and rules of conduct at an early stage Provisions have to be made for checks in relation to failure to consider clients interests for remuneration-related reasons 14 / L_LIVE_EMEA2: v1

16 Setting up, organising and implementing remuneration systems under the Minimum Compliance Requirements List of measures for compliance department: Preparing trend/cause analyses Observing particularly high-performing employees (high turnover, high variable remuneration) Observing ROIs remuneration (collecting data) Recording qualitative data for variable remuneration Programme for recording approaches to clients (without storage) Establishing risk-based focuses Considering s. 36 examination, complaints, etc. for remuneration system 15 / L_LIVE_EMEA2: v1

17 Requirements for variable remuneration components No incentives to place own interests above those of investment services company or those of clients Complete omission of variable remuneration must be possible in individual cases Not only quantitative criteria may be taken into account Use of variable remuneration components Suitable criteria have to be included that are in line with the client s interests (e.g. qualitative criteria) 16 / L_LIVE_EMEA2: v1

18 Examples Positive behaviour Linear calculation of var. remuneration Consideration of qualitative criteria Same criteria for calculation of var. bonus for all sold instruments Adaptation of variable remuneration to investment period / performance of client instruments Negative behaviour Only financial aspects are considered for the var. remuneration Preferential treatment of own instruments Minimum thresholds for sold instruments Higher bonus for specific instruments during marketing campaigns 17 / L_LIVE_EMEA2: v3

19 Determinants of remuneration agreements Federal Labour Court (FLC) Law Banking Act / Remuneration Regulation for Institutions Employment contract Collective bargaining agreement / company agreement Remuneration Minimum Compliance Requirements Principle of equal treatment Company practice 18 / L_LIVE_EMEA2: v1

20 Requirements in relation to orderly business organisation/risk management Remuneration (s. 5 Remuneration Regulation) Appropriate (negative contribution to results must be reflected in remuneration) Transparent Proper incentive system Geared to institution s strategy Long-term targets Avoiding disproportionately high acceptance of risk including significant dependence on variable remuneration fixed promise of severance payment even if contribution to company s results is negative 19 / L_LIVE_EMEA2: v1

21 Regime for all institutions what s new? I Guaranteed variable remuneration Only first twelve months and NEW: condition in relation to own capital/liquidity at time of payment Problem: retention bonuses: conflict between FLC case law Remuneration Regulation since Court does not allow link to individual/business performance Payments in connection with early end of employment Consideration of performance and negative contribution to results Claims under social plans not included Problem: Golden parachutes, temporary allowances, promises regarding severance payments if employee moves into management function? Apparently OK: compensation for loss of social vested rights, capitalisation of contractual term otherwise remaining 20 / L_LIVE_EMEA2: v3

22 Rules for all institutions what s new? II Control units: focus on fixed remuneration Remuneration of senior managers Reasonable relationship between duties and performance Usual remuneration may not be exceeded without special reasons Assessment basis of several years Agreement of possibilities for limitation in case of extraordinary developments Duty to review remuneration systems annually and to modify if appropriate Bonus cap 21 / L_LIVE_EMEA2: v3

23 Bonus cap Applies to ALL employees, not only risk takers Principle: maximum 100% of fixed remuneration Discounting for 5-year deferred payments in instruments (but only 25% of variable remuneration) Exception: 200% of fixed remuneration with consent of shareholders (quorum of 66% or 75% if less than 50% of voting rights are represented) 100% Fixed remuneration +100% 22 / L_LIVE_EMEA2: v1

24 Definition of remuneration (CRD IV) Variable remuneration vs. fixed remuneration Fixed remuneration: payments, regular pro-rated retirement contributions or benefits (unless these benefits are linked to performance criteria) Variable remuneration: additional payments, benefits linked to performance criteria or (in exceptional circumstances) other contractual elements 23 / L_LIVE_EMEA2: v1

25 Definition of remuneration (s. 2(3) and (5) Remuneration Regulation) Variable remuneration vs. fixed remuneration Variable remuneration: the part of the remuneration whose granting or value are at the discretion of the institution or depend on the satisfaction of conditions also covers promises of guaranteed variable remuneration: fixed promise of a bonus in year of entry (s. 5(6) Remuneration Regulation) Fixed remuneration: the part of the remuneration that is not variable also: company car, value allowed for problematic Under Banking Act/Remuneration Regulation variable remuneration is not necessarily linked to performance 24 / L_LIVE_EMEA2: v1

26 Bonus cap - fixed allowances I Depending on the arrangements, risk of prohibited guaranteed variable remuneration Increased risk that considered variable remuneration if Discretion, conditions, rights to revoke and proviso re voluntary nature Orientation of amount to total remuneration in previous year Annual readjustment Losses if employee leaves or commits (predefined) breaches of duty Review in course of financial year, except: change of position without eligibility Assessment method indexing performance reference, e.g. changing annual value of allowance or deviations compared to comparable employees (position, responsibilities, level of hierarchy) 25 / L_LIVE_EMEA2: v1

27 Bonus cap - fixed allowances II Acceptable Allowance related to function, level of hierarchy and responsibilities that is unconditional and for an unlimited period Cancellation during course of year if employee moves to new position Problem: annual review cancellation/downgrade apparently not possible Monthly or annual payment Proviso that allowance may be cancelled in future if statutory bonus cap ceases to apply? May be problematic, at least not if allowance >25 % total pay Co-determination rights of works council on allocation principles Ensure allowance is not taken into account in company pension claims, for example Note: principle of equal treatment 26 / L_LIVE_EMEA2: v1

28 Regulatory requirements vs. employment law ss 305ff German Civil Code (BGB): requirement of transparency and prohibition of discrimination Withdrawal clauses Maximum of 25 % of total pay may be revocable Economic reasons, performance (but not under Remuneration Regulation) Provisos regarding voluntary nature Limited to special payments, not applicable to performance bonus Clauses re relevant dates in connection with performance-related bonuses Not outside assessment period Generally inadmissible for special payments of a mixed nature? Discretionary bonus: reduced to zero if situation is disastrous 27 / L_LIVE_EMEA2: v3

29 Remuneration for senior managers and risk takers Reasonable consideration to be given to results of company and/or group and organisational unit and individual contribution to results Significant institutions (1) Individual contribution to results: achievement of targets regarding quantitative performance criteria qualitative performance criteria (main focus!), e.g. compliance with statutory/internal rules customer satisfaction long-term performance indicators Problem: calculation 28 / L_LIVE_EMEA2: v3

30 Deferral 40% of the remuneration must be stretched out over a period of at least three years or up to at least five years; 60% for senior management and next management level below Significant institutions (2) 50% of deferred and 50% of non-deferred remuneration must depend on sustainable development and be subject to restrictions on disposal During deferral period Claims/expectancy arises on pro rata temporis basis Only claim to error-free calculation of remaining part and not to remuneration itself 29 / L_LIVE_EMEA2: v3

31 Malus clauses Reduction or cancellation of variable remuneration including the deferred remuneration in case of negative contribution to results by person concerned or by relevant organisational unit and negative overall results of institution/group subsequent measurement for past periods possible Significant institutions (3) Standard examples for forfeiture (joint) responsibility for substantial losses breach of external or internal rules of conduct rules regarding suitability Principle: conduct that is in breach of duties must lead to remuneration being reduced Problem: causality, proportionality? 30 / L_LIVE_EMEA2: v3

32 Compensation or severance payments Relating to claims under previous employment relationships Reference to arrangements for individual contributions to company results, penalties and deferral Significant institutions (4) End of guaranteed sign-on bonuses? Mandatory: deferred payment Mandatory: no entitlement in event of negative contribution to results Problem: relationship to s. 5(6) no. 1 Remuneration Regulation: guaranteed variable remuneration during first twelve months permitted 31 / L_LIVE_EMEA2: v3

33 Amendment of existing agreements I Necessary to weigh up risks of various options for amending Works council has right to take part in decision-making at collective level Duty to renegotiate/terminate existing company agreements? Amendment by mutual agreement Increase in fixed salary in return for reduction in variable part Promotion only in return for consent to amendment of contract Problem: Does duty of loyalty lead to duty to consent? Unilateral reduction of bonuses exercising of discretion Bonus cap can essentially limit discretion Problem: clauses to this effect ineffective for performance-related bonuses 32 / L_LIVE_EMEA2: v3

34 Amendment of existing agreements II Exercise of revocation rights and provisos as to voluntary nature of bonus 25% limit regularly exceeded Difficult for performance-related bonus Notice of dismissal and offer of reemployment on altered terms and conditions Notice of dismissal and offer of reemployment in order to reduce wages only allowed in exceptional cases (impending insolvency) Only effective once individual notice period has expired Frustration of contract Questionable whether subsequent regulatory changes represent a change in legislation, especially since Remuneration Regulation does not grant any rights to intervene Important: risk analysis and efforts to amend contracts must be documented 33 / L_LIVE_EMEA2: v3

35 Forfeiture of claims Whole or partial expiry upon order by BaFin: no rights under contractual agreements if these conflict with orders by BaFin Claims conflicting with an appropriate and transparent remuneration system geared towards sustainable development Claims against an institution which takes advantage of state aid Limitation of total annual amount for bonuses to certain part of total annual results or complete cancellation 34 / L_LIVE_EMEA2: v3

36 35 / L_LIVE_EMEA2: v1

37 Thank you for your attention! Dr Harald Glander Jochen Kindermann Dr Hans-Hermann Aldenhoff Verena Braeckeler-Kogel simmons-simmons.com elexica.com 36 / L_LIVE_EMEA2: v1