BaFin implements ESMA guidelines on MiFID II compensation requirements
With a revision of the Special Part 8 of the Minimum Requirements for Compliance (BT 8 MaComp), BaFin is implementing the guidelines of the European Securities and Markets Authority (ESMA) on certain aspects of the MiFID II compensation requirements from April 2023 (ESMA35-43-3565).
Although much seems familiar at first glance, the new BT 8 does indeed emphasize significant points. Unfortunately, many details remain vague. The extent to which the revision will actually affect compensation practices will primarily depend on BaFin’s supervisory practices. The new BT 8 certainly provides material for consideration.
Regulations for salary increases and promotions
The focus of the substantive requirements for compensation systems has so far been on variable compensation components. The revision of MaComp now visually places these substantive requirements in parentheses. They now apply not only to variable compensation components but also, in the form of general requirements for the design of compensation principles and procedures, to all other compensation parameters including salary increases and promotions. Measures of personnel development must not only be based on purely quantitative criteria; qualitative criteria must also be adequately considered. In particular, larger securities service companies (WpDU) would do well to incorporate this into their compensation policies accordingly.
Strengthening qualitative compensation components
Somewhat hidden, the new BT 8 strengthens the importance of qualitative criteria for compensation determination. While the previous version of MaComp merely required that the variable compensation component be determined based on qualitative criteria, the revision now gives them considerably more weight. It first stipulates that the design of quantitative criteria must not create conflicts of interest. However, any remaining conflicts of interest must be “mitigated” by using other criteria, such as compliance with suitability requirements or customer satisfaction. The MaComp now explicitly speak of “equally weighted” qualitative and quantitative criteria.
As an example of a poor practice that is generally impermissible, the MaComp now explicitly mention the measurement of variable compensation primarily based on quantitative economic data. The common practice of quantifying variable compensations, especially for sales staff, solely based on quantitative goal achievement, and considering qualitative criteria only in case of violations, is thus likely to be hardly permissible. Even the fundamental assumption of fulfilling quantitative criteria as long as no violations occur is now likely to be subject to scrutiny based on the new regulations. This is supported by the specification of the controls of compensation principles and procedures, which were already mandatory under the old version of MaComp.
Heightened quality controls “through the backdoor”
Part of these controls should be the assessment of services provided to customers by the responsible compliance function. The MaComp now expressly mention the monitoring of telephone sales and sampling of advisory services and customer portfolios in this context. To the extent not already implemented, the revision of MaComp now obliges such controls “through the backdoor” for every WpDU.
Deferred Payment of Variable Compensation: Comply or Explain
Under the heading “Subsequent Adjustment Criteria and Clawback Clauses,” the MaComp now require considering subsequent adjustment criteria for variable compensation. For preventive reasons, variable compensation components should be able to be adjusted even if the WpDU becomes aware of an employee’s misconduct after bonuses have already been granted or paid out for the relevant period. The MaComp speak of reclaiming payments already made or the deferred payment of variable compensation. Similar provisions, albeit much more detailed, are known from the Institute Compensation Ordinance for Material Risk Takers (MRT) of significant institutes.
The introduction of subsequent adjustment criteria is not mandatory according to the MaComp. BaFin speaks of “should consider.” In typical administrative language, however, this formulation implies much more than mere “can.” If a WpDU decides against implementation, it will likely need to provide a plausible justification for doing so.
New: Governance Rule for Compensation Systems
Newly, governance rules for compensation systems have also been included in the MaComp. Ultimate responsibility for the appropriate design and implementation of the compensation system is placed on the management. The compensation principles, their approval, and changes must be properly documented. The compliance function must be enabled to adequately fulfill its auditing mandate regarding compensation principles and procedures.
Although these governance regulations are not particularly surprising and may not necessarily be new from a substantive perspective, their inclusion in the MaComp underscores their importance. They are likely to carry greater weight in the auditing practice of BaFin and auditors in the future.
