Stricter remuneration rules for the Dutch financial sector as of 2021

On 2 July 2020, the Dutch Ministry of Finance submitted draft legislation on stricter remuneration rules for the Dutch financial sector. This draft legislation includes a retention requirement for certain components of fixed pay, the requirement to consider the social function of the financial firm in the remuneration policy and the tightening of an exemption to the Dutch bonus cap.

What is this about?

The Dutch legislation on remuneration in the financial sector seeks to prevent perverse incentives that may lead to jeopardising a firm’s stability or neglecting customer interests. The legislation has, up until now, been focused primarily on variable pay. Considering the public outcry relating to the proposed increase of the fixed pay of a Dutch bank’s CEO, the Ministry of Finance has indicated that it wishes to contribute further to the recovery of the public trust in the financial sector. Consequently, it is set to put in place additional restrictions and conditions on remuneration.

Which parties should care?

The stricter remuneration rules apply to all financial firms, including banks and asset managers and natural persons working under their responsibility.

What should they know?

The draft legislation on stricter remuneration rules mainly regards:

Retention of fixed pay:

A requirement for management and employees to retain shares or financial instruments of which the value relates to the market value of the financial firm and which are components of fixed pay, for a period of five years. Consequently, such shares and financial instruments may not be sold or exercised for a period of five years after acquiring such components of fixed pay. This requirement will apply to both listed and non-listed financial firms.

The purpose of this requirement is the alignment of interest of the management and the employees with the long-term interests of the financial firm and decreasing the short-term risks of the financial firm. This is similar to the current requirement relating to variable pay under article 94(1)(l) of the Capital Requirements Directive.

Social function:

A requirement that the remuneration policy of a financial firm describes in which way the remuneration of management and employees relates to the social function of the financial firm.

This requirement mainly aims to promote public support for and confidence in the financial sectors as a whole and, therefore, will apply to all financial firms.

Additionally, financial firms that are required to publish a management report, are also required to hold themselves publicly accountable for the implementation of the above.

Tightening of an exemption to the bonus cap:

A tightening of the current exemption to the 20% bonus cap for employees that are not subject to a collective labour agreement. Under the proposed tightening, this exemption may only be applied in exceptional cases and not to individuals that (i) exercise internal control functions or (ii) directly provide financial services to retail clients.

Additionally, if financial firms use this exemption, they must annually inform the AFM thereof.

Furthermore, the draft legislation includes:

• Exemption bonus cap to proprietary traders: the confirmation that the exemption to the Dutch bonus cap for proprietary traders continues to apply.
• EBA Guidelines: technical amendments in relation to the EBA Guidelines on sound remuneration policies. Amongst others, these regard the restriction that adjustment of variable pay may not lead to an increase of the initially awarded variable pay or to an increase of the reduced variable pay.
• Extension decision period AFM: the extension of the decision period for the AFM’s consent with retention pay in excess of the bonus cap from six to nine weeks, where the ECB is the supervisor of the financial firm.

When does this become relevant?

It is expected that the stricter remuneration rules will enter into force on 1 July 2021. However, the draft legislation introduces transitional regimes under which:

• The retention requirement for certain components of fixed pay will apply as of 1 July 2022 to natural persons already working under the responsibility of the financial firm at the expected time of entry into force (1 July 2021). Furthermore, the retention requirement does not apply to shares and financial instruments acquired by such employees before 1 July 2022.
• The requirement to include a description of how the remuneration of management and employees relates to the social function of the firm in the remuneration policy will apply as of 1 July 2022. Therefore, firms that must publicly take account for this, are required to do so for the first time with respect to the financial year 2022.
• The tightening of the exemption to the 20% bonus cap for employees not subject to a collective labour agreement will apply as of 1 July 2022 to natural persons already working under the responsibility of the financial firm at the expected time of entry into force (1 July 2021).

However, as of 1 July 2021, financial firms would need to start revising employment conditions and contractual arrangement with respect to existing employees. This would also regard specific contractual arrangements on the selling of shares, such as provisions on drag along and/or tag along rights.

Any further thoughts?

The draft legislation does not provide specific guidance on how financial firms must describe the relationship between the remuneration of management and employees and the social function of the firm in the remuneration policy. Instead, it is noted that this requirement is ‘principle based’; it focusses on the desired outcome rather than providing detailed guidance.

The draft legislation is available here (in Dutch).