The Commission determines that the assistance provided to the Bank aligns with the rules of the internal market.
The latest developments concerning clawback provisions for severance payments in financial institutions under the German Institutsvergütungsverordnung (IVV), particularly in light of BaFin's proposed administrative regulations, have been summarized as follows:
- Background: The IVV (Institutsvergütungsverordnung) governs the remuneration rules for personnel in credit institutions and financial services institutions in Germany, implementing parts of the EU’s CRD IV package. It aims to ensure that remuneration practices are aligned with risk management and do not encourage excessive risk-taking.
- Clawback Provisions: Clawback provisions allow institutions to reclaim (part of) severance payments if certain conditions occur, such as when the employee engaged in misconduct or the remuneration was based on incorrect financial data.
- BaFin’s Proposed Administrative Regulations (Verwaltungspraxis): BaFin has sought to clarify the application of clawback rules in the context of severance payments, which are a critical element given the concern over potentially large exit packages that might undermine risk management incentives.
- Key Points of the Latest Ruling/Clarification:
- BaFin emphasizes that clawback provisions must be explicitly contractually agreed to be enforceable. The IVV does not itself automatically impose clawback rights; rather, it forms the regulatory framework within which such policies must be implemented.
- For severance payments, BaFin's proposed regulation clarifies that clawback is generally possible only if the payment was based on misrepresentation of performance or misconduct, or if the payment contravenes regulatory requirements.
- The clawback period is subject to limitation, typically up to 5 years, consistent with general remuneration rules under the IVV.
- BaFin suggests institutions must document the basis for clawback provisions clearly in their remuneration policies and must ensure transparency and enforceability.
- Additionally, BaFin’s administrative practice signals that clawback clauses must not be circumvented by structuring payments as severance rather than performance-related bonuses.
- Practical Impact:
- Financial institutions are advised to review and possibly amend existing severance and remuneration agreements to include clear clawback clauses.
- They should also enhance internal processes to monitor and justify severance payments subject to clawback.
- BaFin tends to scrutinize large severance packages closely, especially those that appear inconsistent with performance and risk management profiles.
- Conclusion: The latest clarifications from BaFin reinforce the principle that clawback of severance payments is permissible under the IVV framework but hinges on explicit contractual basis, proper documentation, and clear justification linked to misconduct or misperformance. Institutions must align their contracts and policies accordingly to comply with BaFin’s administrative expectations.
It is worth noting that this article provides a general overview of the situation and readers seeking information on a specific BaFin circular or official document issued recently should consult BaFin’s official communications, as these provide the most authoritative and detailed administrative guidance on clawback implementation under the IVV.
- In light of the latest developments, financial institutions in Germany must explicitly contractually agree on clawback provisions for severance payments, as enforced by BaFin, to ensure compliance with the Institutsvergütungsverordnung (IVV).
- According to BaFin's proposed administrative regulations, clawback of severance payments is possible in instances where the payment was based on misrepresentation of performance, misconduct, or contravention of regulatory requirements.