Overview of regulated remuneration systems

The remuneration systems of key areas of the financial and insurance sectors are extensively regulated. The rules to be applied in a specific case are determined by the supervisory requirements imposed upon the company in question based on its business purpose and, possibly, its size.

The regulatory environment is extremely complex. It ranges from directly binding EU regulations, German laws and ordinances of the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) to circulars and other publications of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) and the German Bundesbank. In addition, there are requirements from EU supervisory and specialist authorities. These include, for example, guidelines of the European Banking Authority (EBA).

The circulars and other publications of the BaFin, in particular, must be observed by users as “soft law”.

Besides the special regulations, general remuneration regulations also apply, in particular the German Stock Corporation Act (Aktiengesetz, AktG). Sections 87, 87a AktG require appropriate, long-term remuneration of the management board. According to Section 161 AktG in conjunction with the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK), there are recommendations on management and supervisory board remuneration.

The special regulation of remuneration systems not only includes requirements for the actual remuneration, but also for the reporting system, i.e. regular and ad hoc reports on remuneration to the relevant supervisory authorities. Special provisions may apply to the public disclosure of the remuneration, e.g. Article 450 of the Capital Requirements Regulation (CRR) (Regulation (EU) 2013/575); in addition, the general disclosure requirements must be observed, in particular, Sections 162 AktG, 289 et seq. of the German Commercial Code (Handelsgesetzbuch, HGB) and, if applicable, Section 161 AktG in conjunction with the DCGK.

Furthermore, the federal and federal state governments have issued guidelines for responsible corporate governance in cases where the state is a shareholder in companies, which also include remuneration-specific requirements.

The information provided here offers an initial insight into regulated remuneration systems, without claiming to be complete.

Please note: Sources available on the internet sometimes refer to old versions of ordinances, laws, circulars and other publications. It is therefore vital to check whether you have the most up-to-date version.

1. Credit and financial services institutions

Credit institutions are companies that conduct banking business within the meaning of Section 1 (1) sentence 2 of the German Banking Act (Kreditwesengesetz, KWG) on a commercial basis or to an extent that requires a commercially organised business operation. Banking business includes, for example, deposit, lending, custodial, guarantee and issuing business.

Financial services institutions are companies that provide financial services within the meaning of Section 1 (1a) sentence 2 KWG for others on a commercial basis or to an extent that requires a commercially organised business operation and that are not credit institutions. Financial services include, for example, investment advice, investment brokerage and proprietary trading in financial instruments.

The remuneration systems of credit and financial services institutions (Section 1 (1) sentence 1 KWG and Section 1 (1a) sentence 1 KWG) are primarily regulated in Section 25a (1) sentence 3 No. 6, (5), (5b) et seq. KWG and in the German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung, InstitutsVergV).

The Remuneration Ordinance applies to all employees of these institutions (Section 2 (7) InstitutsVergV):

• all employees within the meaning of Section 5 (1) of the German Labour Courts Act (Arbeitsgerichtsgesetz, ArbGG),
• all natural persons deployed by the institution in the conduct of banking business or provision of financial services, in particular on the basis of an employment, agency or service relationship,
• all natural persons who, under an outsourcing agreement with an outsourcing company belonging to the group, are directly involved in the provision of services to the institution in order to conduct banking business or provide financial services,
• managing directors within the meaning of Section 1 (2) KWG (natural persons who, by law, articles of association or partnership agreement, are appointed to manage the business and represent an institution or a company in the legal form of a legal entity or a commercial partnership).

In June 2024, the BaFin published the “Questions and Answers on the Remuneration Ordinance for Institutions” (FAQ). These replace the BaFin’s previous aid for interpreting the Remuneration Ordinance for Institutions. These questions and answers are to be observed as “soft law” when implementing the supervisory requirements for remuneration systems.

In the FAQs, the BaFin also stated that it has adopted the EBA's remuneration guidelines – in particular Guidelines EBA/GL/2021/04 of 2 July 2021 – into its administrative practice, with a few exceptions.

2. Securities institutions

Pursuant to Section 2 (1) of the German Supervision of Securities Institutions Act (Gesetz zur Beaufsichtigung von Wertpapierinstituten, WpIG), securities institutions are companies that provide investment services within the meaning of Section 2 (2) WpIG on a commercial basis or to an extent that requires a commercially organised business operation. Securities services include, for example, financial commission business, investment brokerage and investment advice. The law differentiates between large, medium-sized and small securities institutions.

The remuneration systems of large securities institutions (Section 2 (18) WpIG) are subject to the requirements of the KWG and the InstitutsVergV in accordance with Section 4 sentence 1 WpIG.

When the WpIG came into force in 2021, the medium-sized securities institutions were removed from the scope of application of the KWG and the InstitutsVergV. The remuneration systems of securities institutions are governed by the Remuneration Ordinance pursuant to Section 46 (1) WpIG and the Securities Institutions Remuneration Ordinance (Wertpapierinstituts-Vergütungsverordnung, WpIVergV) enacted in January 2024.

In the personal respect, it covers “risk bearers” (Sections 1 (1) sentence 2, 2 (2) WpIVergV), i.e.

• managing directors within the meaning of Section 2 (36) WpIG,
• all employees within the meaning of Section 2 (8) WpIVergV whose professional activities have a material impact on the risk profile of the securities institution or the assets managed by it.

The remuneration regulations of Sections 63 (3), 80 (1) sentence 2 No. 2 and 81 (1) sentence 2 No. 3 of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) apply to small investment institutions (Section 2 (16) WpIG). The remuneration system of small investment institutions is therefore subject to the “MaComp” (Circular 05/2018 (WA) - Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency), there: “BT 8 Requirements for remuneration systems in connection with the provision of investment services and ancillary investment services”.

Regardless of the distinction between large, medium-sized and small investment firms, all providers ofinvestment services or ancillary investment services within the meaning of Section 2 (10) WpHG should be aware that further requirements for remuneration systems may apply (see Section 63 (3), Section 80 (1) sentence 2 No. 2, Section 81 (2) sentence 2 No. 3 WpHG in conjunction with Art. 27 and Art. 34 Delegated Regulation (EU) 2017/565). This also applies to branches and tied agents based or habitually resident in Germany within the meaning of Section 53b KWG, although exceptions do exist. The BaFin has specified the requirements in the MaComp. In this respect, the MaComp is not generally subordinate to the other supervisory law remuneration regulations, rather only to the extent that they contradict the KWG, the InstitutsVergV, the WpIG, the WpIVergV, the German Investment Code (Kapitalanlagegesetzbuch, KAGB) together with any implementing provisions, the German Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG) and the German Insurance Remuneration Ordinance (Versicherungs-Vergütungsverordnung, VersVergV). Credit and financial services institutions that are not investment firms within the meaning of Section 2 (10) WpHG are subject to general organisational requirements, in particular Section 25a (1) KWG, but not to the requirements of Sections 63 et seq. WpHG in conjunction with the MaComp.

3. Capital management companies

Pursuant to Section 17 (1) KAGB, capital management companies are companies with a registered office and head office in Germany whose business operations are geared towards managing domestic investment funds, EU investment funds or foreign alternative investment funds (Section 1 (3) KAGB).

For capital management companies, the remuneration regulation is derived from Section 37 (1), (2) KAGB in conjunction with Annex II of Directive 2011/61/EU and Art. 14a (2), Art. 14b (1), (3), (4) of Directive 2009/65/EC.

In the personal respect, the following are covered pursuant to Section 37 (1) KAGB:

• managing directors (Section 1 (15) KAGB),
• employees whose activities have a material influence on the risk profile of the management company or the managed investment funds (risk bearers),
• employees with control functions and
• all employees who receive an overall remuneration that puts them in the same income bracket as managing directors and risk bearers.

Small capital management companies that only manage special AIFs (Section 2 (4) KAGB) and managers of proprietary funds (Section 2 (3) KAGB) are not subject to any remuneration regulation.

4. Stock exchange operators

Pursuant to Section 2 (1) of the German Stock Exchange Act (Börsengesetz, BörsG), stock exchanges are institutions under public law that regulate and supervise multilateral systems that bring together or promote the bringing together of the interests of numerous persons in buying and selling commodities and rights admitted to trading there within the system according to predetermined rules in a manner that leads to a contract for the purchase of these commodities. Depending on the traded assets, a distinction is made between securities exchanges (Section 2 (2) BörsG) and commodity exchanges (Section 2 (3) BörsG).

Operators of stock exchanges in Germany are also subject to special regulatory requirements regarding remuneration. Since they are not credit institutions within the meaning of the KWG, the InstitutsVergV does not apply. However, it follows from Section 17 (1a) sentence 2 BörsG that stock exchange fees must not create incentives to place, modify or cancel orders or to conduct transactions in such a way that this contributes to impairments of exchange trading or to market abuse. In addition, stock exchange operators that operate a central counterparty (CCP) (e.g. clearing companies) are subject to the EMIR regulations. This gives rise to specific remuneration rules for CCP board members under Art. 26 (5), Art. 27 EMIR, according to which the remuneration policy must be compatible with sound risk management and prevent remuneration incentives for risky conduct.

5. Further cases of financially regulated remuneration systems

Special rules apply to other financially regulated companies, such as providers and service providers of crypto-assets in accordance with the European Regulation on Crypto-assets (MiCAR / Regulation (EU) 2023/1114 on markets in crypto-assets). The remuneration systems of, for example, mortgage banks, payment service providers/e-money institutions or building societies must take the business-related specifics into account.

6. Insurance companies

Insurance companies within the meaning of Section 1 (1) No. 1 in conjunction with Section 7 No. 33 VAG are primary or reinsurance companies whose object is to engage in insurance business and which are not social security institutions, with it being understood that the object of a reinsurance company is exclusively reinsurance.

In addition to insurance companies, all companies that fall under the scope of application of Section 1 (1) VAG are subject to the remuneration regulations under insurance supervision law. These also include insurance holding companies and pension funds.

The fundamental requirements for the remuneration systems of insurance companies and other supervised companies within the meaning of Section 1 (1) VAG arise from Section 25 (1) to (5) VAG.

In the personal respect, the regulation covers

• managing directors,
• employees and
• supervisory board members.

In addition, Art. 275 of the Delegated Regulation (EU) 2015/35 establishes specific requirements for remuneration policies and practices of primary insurance and reinsurance companies subject to the supervisory regime of Solvency II. The requirements of Art. 275 of the Delegated Regulation (EU) 2015/35 are substantiated in particular by an interpretative decision of the European Insurance and Occupational Pensions Authority (EIOPA), which is addressed to the national supervisory authorities, and an interpretative decision of the BaFin.

Small insurance companies within the meaning of Section 211 VAG and other companies in accordance with Section 1 (1) Nos. 2-5 VersVergV (including insurance holding companies and pension funds) may voluntarily apply Art. 275 of Regulation (EU) 2015/35 in order to enable a uniform group-wide remuneration structure. If they do not exercise this option, the Insurance Remuneration Ordinance continues to apply to them. This contains special rules for significant insurance and reinsurance companies and pension funds, such as the establishment of a remuneration committee consisting of members of the supervisory body.

The results of a BaFin survey dated 2022 show the diversity of remuneration structures practiced by insurance companies.

7. Insurance distribution

Special remuneration rules also apply to the distribution of (primary) insurance and insurance-based investment products, which are designed to counteract disincentives.

The fundamental requirements for the remuneration of insurance distribution are regulated by Section 48a (1) sentence 1 VAG. They are accompanied by a ban on passing on special allowances and commission (Sections 48a, 48b VAG) and a pass-through requirement (Section 48c VAG). In addition, a statutory commission cap applies to the brokerage of substitutive health insurance contracts and residual debt insurance (Sections 50, 50a VAG). These legal provisions, which insurance companies and pension funds must observe when distributing insurance, are set out in a BaFin Circular (Section B.VII.).

Sections 14 and 19 of the German Insurance Mediation and Advice Ordinance (Verordnung über die Versicherungsvermittlung und –beratung, VersVermV), which implements Directive (EU) 2016/97 on insurance distribution (Insurance Distribution Directive, IDD), contain independent provisions for intermediaries of insurance and insurance-based investment products.

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