Specification of the company-related scope of application of the IVV (Section 1 (1) sentence 1 IVV 5.0-E): New regulations, among other things, on remuneration governance for CRD third-country branches, including with regard to management, supervisory bodies and the identification of risk carriers

Section 1 (1) sentence 1 IVV 5.0-E explicitly mentions CRD third-country branches within the meaning of Section 53c KWG 2025-E for the first time as legal entities falling under the corporate scope of application of the IVV. The background is the (more comprehensive) updating of the regulatory requirements for CRD third-country branches in Sections 53 et seq. KWG 2025-E implementing the relevant provisions of CRD VI. CRD third-country branches within the meaning of Section 53c KWG 2025-E exist in accordance with Section 53c (1) KWG 2025-E if (a) the parent company would qualify as a CRR credit institution if it were based in the EU, and the branch carries out at least one of the activities listed in Annex I No. 2 or No. 6 CRD VI (= lending transactions, in particular consumer loans, credit agreements in connection with real estate, factoring with/without recourse, trade finance). I No. 2 or No. 6 CRD VI (= lending transactions, in particular consumer credit, credit agreements relating to real estate, factoring with/without recourse, trade finance (including forfaiting)), or (b) the branch carries out deposit business or other business within the meaning of Annex I No. 1 CRD VI.

Pursuant to Section 53cg (1) KWG 2025-E, these CRD third-country branches must appoint two natural persons resident in Germany to manage the business, who are also considered managing directors within the meaning of the IVV (Section 53cg (1) sentence 2, 1 (2) KWG 2025-E) and to whose remuneration system, in addition to the general requirements, the special provisions of Section 10 IVV also apply. In addition, pursuant to Section 53cg (2) No. 3 KWG 2025-E, CRD third-country branches must also meet the requirements for the establishment and powers of the supervisory authority from a regulatory perspective, which include, among other things (a) the possible establishment of a remuneration control committee in accordance with Section 25d (7) and (12) KWG, and (b) the supervisory responsibilities pursuant to Section 3 (2) IVV for the content of the remuneration systems for managers and for monitoring the remuneration systems for other employees. In accordance with Section 53cg (2) No. 3 KWG 2025-E, the administrative or supervisory body of the company shall be deemed to be the administrative or supervisory body of the CRD third-country branch. With these provisions on remuneration governance, the German legislator goes beyond the corresponding requirements of Article 48(2) CRD VI, which essentially (only) gives Member States the option of establishing local administrative committees at the branch and therefore limits remuneration governance to the (EU) country of domicile of the third-country branch. This material extension of the scope of application of the supervisory requirements of the KWG to the supervisory body of the company of the CRD third-country branch has been viewed critically in the consultation process to date from the perspective of supervisory governance practice – it therefore remains to be seen whether the legislator will modify this provision in the further legislative process in favour of the more limited scope of the supervisory requirements for the supervisory body specified in Article 48(2) CRD VI.

Third-country branches should also determine Material Risk Taker in accordance with Section 25a (5b) KWG, pursuant to Section 53cg (2) sentence 1 no. 2 KWG 2025-E.

Extension of the personal scope of application of the requirements for the remuneration of managers to de facto managers (Section 1 (2) KWG 2025-E)

The extension of the personal scope of application of the provisions on the remuneration of managers to include persons who actually manage the institution's business (de facto managers under supervisory law) follows from the corresponding extension of the definition of management in Article 3 (1) (8a) CRD VI. The remuneration systems for de facto managers under supervisory law will in future be subject, among other things, to the special requirements of Section 10 IVV on the remuneration of managers.

The legal concept of the de facto manager is not reflected in the current domestic supervisory corporate governance structure, which (only) refers to the manager as the person formally appointed in accordance with the company law requirements applicable to the specific legal form of the institution. The legislator does not further specify the term ‘de facto manager’ in the KWG 2025-E, so that according to the draft legislation, the specific requirements for qualifying an individual as a de facto manager under supervisory law remain unclear – in particular with regard to the question of what specific tasks, responsibilities and powers the specific person must fulfil in order to qualify as a de facto manager for supervisory purposes.

Most significant substantive amendment proposal for remuneration systems: Future determination of the remuneration parameters for (variable) remuneration before the start of the reference period? (Section 4 sentence 3 IVV 5.0-E)

The most significant material change for remuneration practice is contained in the proposed revision of Section 4 (3) IVV 5.0-E, according to which the remuneration parameters are to be determined before the start of the assessment period. According to the explanatory memorandum to the bill, the legislator understands this revision of Section 4 (3) IVV as a clarifying addition, in that it (only) codifies established remuneration practice.

In fact, remuneration practice under the previous regulations at the time of determining the remuneration parameters in accordance with Sections 4 and 13 IVV is understood to mean that the remuneration parameters, in particular for performance-based variable remuneration, must be determined at the beginning of the respective reference period and that, therefore, in the case of variable remuneration with a one-year reference period, the corresponding performance parameters must be determined by the end of the first quarter of the reference period at the latest (= in the case of calendar year reference periods/financial years, i.e. by 31 March at the latest). This understanding reflected, among other things, the guiding principles of robust and sustainable corporate planning in accordance with the business and risk strategy: According to these principles, the robust planning data relevant in particular for the institution-related performance parameters of the reference period can generally be decided by the management at the earliest in the second half of the fourth quarter of the previous year, since – from a typical perspective – it is usually only at this point in time that all risks from the business and risk strategy that are operationalised for the reference period can be sufficiently operationalised. The cascade-like implementation of institution-related performance parameters in the variable remuneration of management, other risk takers and other employees, which is also preferred by the supervisory authority, can then only be realised in the first quarter of the reference period from a time perspective.

The stipulation in Section 4 (3) IVV 5.0-E that the parameters be determined before the start of the reference period – which is not mandatory under CRD VI – would lead to a methodological break in this procedural approach and would be difficult for many (especially smaller) institutions to implement in practice. Against this background, in the consultation process on the BRUBEG that is already underway, the remuneration practice has proposed an amendment to the provision in Section 4 (3) IVV stipulating that the parameters be determined at the beginning of the reference period.

Content of remuneration parameter I: Consideration of ESG risks (Section 4 (4) IVV 5.0-E)

The explicit consideration of ESG risks in the content of the remuneration parameters, as specified in Section 4 (4) IVV 5.0-E, is linked to the requirements of Articles 74 (1) (e), 76 (2) and 94 (1) (a) CRD VI, according to which ‘remuneration policy and remuneration practices must be consistent with and promote sound and effective risk management, also taking into account the risk appetite of institutions in relation to ESG objectives’ and the handling of ESG risks must also be taken into account when determining the remuneration parameters for performance-related remuneration.

To assist with remuneration practices, the legislator explains in the explanatory memorandum to Section 4 sentence 4 IVV 5.0-E that the statutory provision is intended to reflect previous supervisory practice. Among other things, the statements made by BaFin in its ‘Questions and Answers on the Institutional Remuneration Regulation’ (FAQ IVV) dated 13 June 2024 can be consulted for this purpose in which BaFin announced that it primarily locates the consideration of the relevant ESG risks and associated ESG objectives in the business and risk strategy of the institution and that institutions must derive the relevant ESG-related performance parameters from the ESG strategy located in the business and risk strategy. Even after the addition of Section 4 IVV to Section 4 S. 4 IVV 5.0-E, institutions should therefore not have to establish independent remuneration parameters that are detached from their business and risk strategy. Rather, the relevant ESG criteria should be derived from the existing strategic guidelines. At the same time, the explicit standardisation increases the binding nature of the requirement: in future, institutions will have to document even more clearly that relevant ESG risks are actually incorporated into their remuneration parameters.

Content of remuneration parameters II: Consideration of financial and non-financial criteria, including ESG criteria (Section 5 (1) No. 7 IVV 5.0-E)

The extension of the statutory catalogue of requirements for the appropriate design of remuneration systems specified in Section 5 (1) No. 7 IVV 5.0-E, according to which financial and non-financial criteria, including ESG criteria, must be taken into account in the case of performance-related variable remuneration, is intended, according to the explanatory memorandum to the law, (only) a clarification of the previous supervisory expectations.

Remuneration practice can draw two key conclusions from this clarification of supervisory expectations (only) intended by the legislator:

1. Non-financial criteria must not be mandatory performance parameters for the variable remuneration of employees identified as risk takers in non-significant institutions within the meaning of Section 1 (3c) KWG (bI) or in qualified non-significant institutions within the meaning of Section 1 (1) sentence 3 IVV (qnbI) and for all employees not identified as risk takers in all institutions. The new supervisory regulation in Section 5 (1) No. 7 IVV 5.0-E can also be implemented in the remuneration systems for these employees by including a corresponding reflection in the catalogue of criteria to be qualified as negative performance parameters within the meaning of Section 5 (2) IVV. The performance-based variable remuneration of Material Risk Takers in BI and qnBI regularly includes financial and non-financial criteria – unchanged – in their quantitative and qualitative remuneration parameters, which must be defined in accordance with Section 19 (2) sentence 1 IVV.
   
2.  The differentiation described in (1) also covers the ESG criteria. As has been customary practice to date, these can also be taken into account in the variable remuneration of Material Risk Takers in non-significant institutions and employees not identified as Material Risk Takers in all institutions via the catalogue of negative performance contributions (here, in particular, with regard to governance-related criteria with compliance with the relevant external and internal binding framework conditions for the specific activity).

Content of remuneration parameters III: Special requirements for the variable remuneration of employees in the consumer credit business (Section 5 (1) Nos. 4 and 5 IVV 5.0-E) and of employees responsible for creditworthiness (Section 5 (1) No. 5 IVV 5-0-E)

The amendments provided for in Section 5 (1) Nos. 4 and 5 IVV 5.0 -E extend the group of persons affected by the special function-related requirements of Section 5 (1) Nos. 4 and 5 IVV regarding the content of variable remuneration from employees previously only working in the real estate consumer loan business to all employees working in the consumer credit business. In terms of content, institutions must apply the requirements already applicable under Section 5 (1) Nos. 4 and 5 IVV (= in particular, no remuneration-related misguided incentives with regard to the legal obligation of the relevant employees to provide advisory services in the best interests of the borrower) to the expanded group of persons.

In addition, the newly inserted Section 5 (1) No. 5a IVV stipulates that the remuneration policy for employees responsible for assessing creditworthiness must be compatible with and conducive to sound and effective risk management. This provision serves to implement the Consumer Credit Directive (EU) 2023/2225, according to which creditworthiness checks must be carried out independently and free of misguided incentives. In terms of content, this legal requirement is unlikely to result in any significant changes to the remuneration structure for this group of people, as the compatibility of variable remuneration with sound and effective risk management is a general guiding principle for such remuneration systems. What is new, however, is that this obligation is now also explicitly enshrined in the text of the regulation for creditworthiness assessment staff, which is likely to tighten the requirements for documentation and evidence to the supervisory authority.

Extended requirements in remuneration governance: Involvement of the supervisory body (also) in the identification of risk takers in non-significant CRR institutions and in qnbI and direct monitoring of the remuneration system for heads of control units (Section 3 (1) sentence 4 and (3) IVV 5.0-E)

According to Section 3 (1) sentence 4 IVV, all CRR institutions will in future be required to involve their supervisory body in the process of identifying risk takers. This statutory extension applies to non-significant CRR institutions, which must now also take into account in their remuneration governance the requirement for management to inform the supervisory body about the process of identifying risk takers in the supervisory body's meeting calendar.

From a supervisory perspective, the content of the regulatory extension specified in Section 25d (1) sentence 1 no. 1 KWG 2025-E to include the ‘direct monitoring of the appropriate design of the remuneration systems for the heads of internal control units’ is not entirely clear. With this provision, the German legislator aims to implement the identical content of Art. 92(2)(f) CRD VI. The provision is clearly aimed at maintaining the division of responsibilities between the management and the supervisory board as defined in Section 3 IVV, with the management retaining responsible for the content and implementation of the remuneration systems for the heads of the control units. In practice, the extension of the regulation could be implemented as needed in such a way that the supervisory body's monitoring of the implementation of the remuneration systems for the heads of the control units is taken into account in the meeting calendar with a special emphasis on the respective agenda item for the implementation of the monitoring of the remuneration systems for employees in accordance with Section 25d (1) sentence 1 KWG.

Other updated requirements

The other material changes in the content of remuneration systems and remuneration governance concern:

1. the extension of the group of parent companies that, in accordance with Section 27 IVV, are required to develop a group-wide remuneration strategy and monitor its implementation in the subordinate companies to include parent financial holding companies, mixed parent financial holding companies, EU parent financial holding companies and mixed EU parent financial holding companies (Section 1 (1) sentence 3 IVV 5.0-E);
2. the possible expansion of the group of institutions qualifying as qnbI within the meaning of Section 1 (3) lit. c) IVV, according to which a CRR institution will in future already qualify as a qnbI if it meets one of the quantitative thresholds specified in lit. c) (= 2% of total on-balance sheet and off-balance sheet assets or 5% of the total value of all derivative positions). The legislator is thereby correcting the editorial error contained in the current version of Section 1 (3) (c) IVV in the implementation of Article 4 (1) No. 145 (c) to (e) CRR (which also refers to exceeding the alternative threshold), which required both thresholds to be met cumulatively. Individual CRR institutions have already been using the alternative assessment to determine whether a bank qualifies as a qnbI in accordance with Section 1 (3) sentence 2 lit. c) IVV, in compliance with EU law pursuant to Article 4 (1) No. 145 CRR.
3. In implementation of the CRD VI requirements, the legislator is making an editorial change to the term ‘control unit’ to ‘internal control function’ in the relevant provisions (including Sections 2 (11), 3 (3), 7 and 9).

Outlook: Further implementation of the legislative process

The legislator is currently continuing the legislative process for both laws. The new provisions on IVV 5.0 (a) from the BRUBEG are to come into force on 11 January 2026 (Art. 28 para. 1 BRUBEG); although individual provisions, in particular those relating to the new regime for CRD third-country branches (Sections 53c et seq. KWG 2025-E), will not enter into force until 11 January 2027; and (b) from the Consumer Credit Act on 20 November 2026. We are monitoring the further development of the legislative process.