Day-to-day management and supervisory board members are increasingly subjected to strict regulatory rules. Within financial institutions, the rules regarding the suitability of these people for such positions have become increasingly strict and remuneration policies have become more restrained. It is clear that the implementation of the EU Capital Requirements Directive IV(1) will further tighten the already strict regulations on financial institutions' remuneration policies. The EU financial regulator has initiated these developments because it believes that the economic crisis was caused partly by the incompetence of day-to-day management and supervisory board members, and partly by the existing, irresponsible remuneration policies.
The Dutch financial regulator has also taken this issue seriously. On February 27 2013 the Dutch Central Bank and the Authority for the Financial Markets published a letter stating that nearly 10% of the supervisory board members of the four largest Dutch banks and insurance companies failed a recent suitability screening.(2) Further, recent media articles have confirmed that the remuneration policies of various financial institutions are in the process of being amended – for example, Delta Lloyd has limited its 2013 variable remuneration to 50% of the fixed salary.
This update discusses the suitability requirements and rules on restrained remuneration policies within financial institutions. It also considers the effect of this legislation on the daily work of general counsel.
The new suitability requirements will apply to all financial institutions and pension funds in the Netherlands. The requirements will continue to apply to the members of a supervisory body as they have done since July 1 2012. Day-to-day management and supervisory board members (known as 'policymakers') must be "suitable" according to the existing regulations, whereas previously they had to be only "sufficiently experienced". The legislature's goal appears to have been to widen the scope of the requirements. For instance, under the previous regulations, it was possible to be considered "sufficiently experienced" if a policymaker had sufficient knowledge of his or her area of expertise, even though he or she lacked the time to carry out his or her function properly (eg, because he or she held many additional positions).(3) In this situation, the policymaker might have been "competent", but not "suitable".(4) Under the new regime, policymakers are now subject to a higher standard due to the new terminology.
The suitability criteria for day-to-day managers differ from those for supervisory board members. A director is suitable if he or she has the right skills with respect to four specific areas,(5) and can apply such skills correctly. For supervisory board members, more focus is placed on "soft skills".(6) The suitability screening can take place before or after the appointment of a supervisory board member, if relevant aspects of his or her suitability change.(7)
If a policymaker fails the screening, the consequences can be far reaching: he or she will not be allowed to take up the position. Therefore, the criteria for appointment of a policymaker should be aligned with the suitability requirements. Furthermore, the employment agreement should contain a condition subsequent stating that the contract is subject to the employee successfully passing the screening. As a last resort, the financial regulator may instruct a financial institution to dismiss a certain policymaker.(8) However, the question is whether this will automatically end the appointment of that policymaker. This is not the case if he or she has an employment contract, unless it contains a condition subsequent. Another consideration is whether such a condition subsequent will be allowed. Legal precedents show that a condition subsequent in an employment agreement may be allowed, but only under strict conditions.(9) Another key question is whether the termination will have consequences for any possible severance payment. All of these issues should be considered when considering the appointment of a policymaker.
The Rules on Sound Remuneration came into effect on January 1 2011, as part of the implementation of the EU Capital Requirements Directive III. Financial institutions are bound by these rules, which force them to implement sound remuneration policies. The rules are binding on day-to-day management, but may also apply to personnel at lower echelons.(10) The government addressed this topic in its coalition agreement, proposing legislation to cap variable remuneration within the financial sector to 20% of the fixed remuneration.(11)
The starting principle of the rules is that:
"the remuneration policies of the financial institution shall be consistent with and promote sound and effective risk management and shall not encourage risk-taking in excess of the financial institution's risk tolerance level."(12)
In order to effect this, strict requirements apply when awarding variable remuneration. For instance, financial institutions will have to spread out performance-related remuneration over several years in order to ensure a long-term commitment.(13) In addition, financial institutions cannot award guaranteed variable remuneration, other than in the context of hiring new staff. Furthermore, financial institutions must have an internal supervisor (eg, the supervisory board) which, among other things, periodically tests and approves the general principles of the remuneration policy.(14) If a financial institution breaches these rules, the Dutch Central Bank may fine it between €500,000 and €1 million.
Although the stricter rules on remuneration of (top-tier) day-to-day managers have been welcomed, they have also led to criticism. As yet, the consequences from an employment law perspective are unclear. Can an employer interfere with a (contractually agreed) remuneration commitment based on the rules? Legal precedents show that if the employer does act in this way, the courts will consider themselves free to rule independently (eg, regarding severance payments), even if such decision is contrary to the rules.(15)
Financial institutions should be aware of the rules regarding suitability screening and should take into account the possibility that a policymaker may fail this screening. The existing regulations also require financial institutions to screen their remuneration policies and, if necessary, to review them. If an institution's remuneration policy has already been adjusted accordingly, it may need to be further revised in light of the requirements introduced by the Capital Requirements Directive IV concerning the relationship between the variable and fixed components of remuneration.
It is questionable whether the existing rules offer sufficient grounds to set aside existing contractual commitments. This will have to be assessed on a case-by-case basis and, if challenged, reviewed by the courts.
For further information on this topic please contact Maartje Govaert or Robert Gielisse at Norton Rose Advocaten & Solicitors by telephone (+31 20 46 29 300), fax (+31 20 46 29 333) or email (email@example.com or firstname.lastname@example.org).
- management, organisation and communication;
- products, services and markets where the institution is active;
- sound and ethical business operations; and
- balanced and consistent decision making.
See Section 1.2 of the Policy Rules on Suitability 2012.
(10) The rules also apply to employees holding a senior management, risk-taking or control position and/or employees whose total remuneration is equal to or higher than the remuneration of categories of the aforementioned employees, and whose activities have a material impact on the risk profile of the financial institution (Section 3 of the regulations).
(15) AM Helstone, 'Financieel toezicht op beloningen', Journal on Employment & Business, July 2012. See also the Court of Appeal of Amsterdam, September 28 2010, JAR 2010, 270, the Subdistrict Court of Amsterdam, December 8 2011, JAR 2011, 17 and the Subdistrict Court of Groningen, January 9 2013, LJN BZ1095.
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