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Introduction

Hello my name is Maartje Govaert and I am Head of the Norton Rose Fulbright Employment and Labour Law Team in Amsterdam.

The European financial regulators believe that de economic crisis is partly caused by the incompetence of the day-to-day management and supervisory board members of financial institutions (the so called policymakers). Another important reason is the current remuneration policy, which they believe is too irresponsible. The rules regarding the suitability of the policymakers of financial institutions have become increasingly strict and the remuneration policies have become more restrained. I will address how this impacts financial institutions in the Netherlands.

Suitability

The new suitability requirements will apply to all financial institutions and pension funds within the Netherlands. It seems that the legislator wanted to widen the scope of the requirements, as previously the policymakers only had to be ‘sufficiently experienced’. But since the 1st of July 2012, according to current regulation, the policymakers have to be ‘suitable’, which means that under the new regime they are subjected to a higher standard.

A director is suitable if he has the right skills and can apply those skills correctly, but for the supervisory board members the suitability criteria are different, since more focus is placed on ‘soft skills’. The suitability screening takes place prior to the appointment of a supervisory board member. In case relevant aspects of their suitability changes, the screening can also take place after the appointment. To show this is taken seriously, the four biggest financial institutions have been screened and not all policymakers have passed.

Appointment of policymaker

When considering the appointment of a policymaker, the following issues should be considered:

  • Since failing the screening leads to not being allowed to hold the position, the criteria for the acceptance should be aligned with the suitability requirements.
  • Furthermore, it is recommended that the employment agreement contains a condition subsequent which states that the contract is subject to the employee successfully passing the screening.
  • As a last resort, the financial regulators may instruct a financial institution to dismiss a certain policymaker. Though, when this person has an employment contract, this will not automatically end the appointment of this policymaker, unless a condition subsequent has been included.

Another consideration is, whether such a condition subsequent will be allowed. Legal precedents show that it is only allowed under strict conditions. Also interesting is the question whether the termination on this ground will have consequences for a possible severance payment.

Remuneration requirements

In 2010, the Capital Requirements Directive III (CRD III) set out fixed remuneration requirements. On the 1st ofJanuary 2011 the Rules on Sound Remuneration came into effect in the Netherlands, as the implementation thereof. Financial institutions are bound by these Rules which force them to have a sound remuneration policy. The Rules are not only binding on day-to-day management, but may also apply to personnel at a lower level. The Dutch government has addressed this topic in its coalition agreement, suggesting legislation to maximize the variable remuneration within the financial sector to 20 percent of the fixed remuneration.

Remuneration consists of all forms of payments or benefits made directly by, or indirectly, but on behalf of, institutions within the scope in exchange for professional services rendered by relevant staff. Such remuneration includes fixed remuneration which reflects an employee’s professional experience and their level of responsibility within their organisation as set out in their terms of employment. And variable remuneration which reflects performance in excess of that required to fulfil the employee’s terms of employment and is subject to performance adjustment.

When awarding variable remuneration strict requirements apply to financial institutions:

  • They will have to spread out the performance-related remuneration over several years in order to ensure a long term commitment.
  • They are not allowed to award guaranteed variable remuneration, other than in the context of hiring new staff.
  • An internal supervisory (for example the supervisory board) is needed which, amongst others, often tests and approves the general principles of the remuneration policy.

Keep in mind that a breach of these Rules may lead to a fine from the Dutch Central Bank which amount ranges from EUR 500.000 to a maximum of EUR 1.000.000.

Which staff?

On the 21st of May 2013 the European Banking Authority published a consultation paper on draft regulatory technical standards on the criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile. The draft regulatory technical standards will have direct effect, which means that there will be limited scope for member states to vary the interpretation.

The draft regulatory technical standards provide that an individual will be identified staff if they satisfy one or more of the following criteria:

  • internal criteria established by a firm to identify material risk-takers;
  • qualitative criteria that seeks to identify those staff who are involved in management and/or have authority to expose the firm to credit risk exposures and market risk transactions above certain thresholds; or
  • quantitative criteria based on an individual’s total remuneration, both in absolute and relative terms.

Remuneration issues

The Rules have also led to criticism, because it is unclear what the consequences are from an employment law perspective. For example, is the employer allowed to interfere with a (contractually agreed) remuneration commitment on the basis of the Rules? If the employer acts in this way, case law shows that the Dutch courts will consider themselves free to judge independently, for instance regarding severance payments, even when this is contrary to the Rules.

Current regulation requires that financial institutions screen their remuneration policy and, if necessary, review it. If the remuneration policy within your company has already been adjusted accordingly, I would like to point out that the CRD IV introduces requirements concerning the relationship between the variable components of remuneration and the fixed components. On the 1st of January 2014 it will come into force. It carries forward the existing remuneration requirements introduced by CRD III as well as introducing new rules in relation to bonus caps.

Conclusion

This video is intended to give you information about the rules regarding the suitability and remuneration of the policymakers of financial institutions. If you would like a meeting or more information then please feel free to contact me on the details provided, Maartje Govaert, by email on [email protected]