Expected 20% bonus cap for all staff
On 1 August 2014, the CRD IV Implementation Act (the Implementation Act) and the Dutch Central Bank Regulation on Sound Remuneration Policies 2014 (the Regulation), implementing the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation, entered into force.
In accordance with CRD IV, the Implementation Act provides for a bonus cap of – in principle – 100% of fixed pay of Identified Staff of credit institutions and investment firms. The bonus cap may be increased to a maximum 200% of fixed pay after shareholders' approval. The Netherlands has not implemented the possibility provided for in CRD IV to apply a discount rate of 25% of total variable pay, provided it be paid in in instruments with a five year deferral, in practice resulting in a bonus cap higher than 100% or 200%.
After the implementation of the pay constraints pursuant to the Capital Requirements Directive III (CRD III), in 2011, the implementation of CRD IV is the next step in a series of measures to restrain remuneration policies in the financial sector. On 16 October 2014 the Dutch Lower House passed a bill providing for an even stricter bonus cap of 20% of fixed pay.
The CRD IV bonus cap
In line with the implementation of the regulations on variable pay provided in CRD III and the Guidelines on Remuneration Policies and Practices of the Committee of European Banking Supervisors (now European Banking Authority), the majority of the new rules on variable pay pursuant to CRD IV, including the bonus cap, only apply to Identified Staff (ie categories of staff including senior management, risk takers, staff engaged in control functions and staff receiving total remuneration similar to that of senior management and risk takers, whose professional activities have a material impact on their risk profile). However, with the introduction of CRD IV, the European Banking Authority introduced new criteria for the selection of Identified Staff which will lead to a significant increase of Identified Staff.1 Consequently, the CRD IV bonus cap will apply for a much larger number of staff than initially expected.
The bonus cap of 100% of fixed pay applies to European Economic Area (EEA) based credit institutions and investment firms and EEA subsidiaries of non-EEA credit institutions and investment firms. Certain other rules on remuneration than the bonus cap, pursuant to CRD IV, have been implemented in the Regulation, which provides for an extended scope, ie financial enterprises which also includes – amongst others – insurance companies (as was the case with the implementation of CRD III).
The bonus cap
In principle, a bonus may not exceed 100% of a year's fixed pay. However, in line with CRD IV, the Implementation Act provides for the possibility to increase the bonus cap to a maximum of 200% of a year's fixed pay provided that shareholders have approved such higher ratio with a supermajority of at least 66% of the votes cast (with at least 50% of the shares represented) or of at least 75% (in the event less than 50% of the shares are represented) and in accordance with a strict procedure to be applied. Although the European Banking Authority has not yet provided guidance on the interpretation of CRD IV, we believe – based on the "group context" which is applicable to CRD III and CRD IV – that such approval should come from the shareholder of the ultimate EEA parent company of a group. This is in line with the Policy Statement published by the Bank of England Prudential Regulation Authority in December 2013. The latest update on the expected new guidelines from the European Banking Authority is that it is currently reviewing the existing remuneration guidelines (published by the Committee of European Banking Supervisors in November 2010) to ensure a higher level of harmonisation of remuneration practices in line with CRD IV and that it is expected to launch a consultation on revised guidelines by the end of 2014.2
Finally, although CRD IV offers the possibility that 25% of variable pay may be discounted for applying the bonus cap, resulting in practice in a higher bonus cap than 100% or 200%, the Netherlands has not implemented that possibility.
The Act on Remuneration Policies in Financial Enterprises
The bill of the long talked about Act on Remuneration Policies in Financial Enterprises (ARPFE) was passed by the Dutch Lower House on 16 October 2014. In the Netherlands and abroad, the ARPFE is known for its 20% bonus cap. Contrary to the bonus cap pursuant to CRD IV, which is applicable to Identified Staff of credit institutions and investment firms, the 20% bonus cap provided for in the ARPFE will be applicable to all staff of financial enterprises, which includes (amongst others) insurance companies and premium pension institutions.
Although the bonus cap in the ARPFE is referred to as the 20% bonus cap, a number of exceptions apply, leading to a higher bonus cap or even an exemption to the bonus cap:
(a) for staff in the Netherlands whose employment conditions are not exclusively covered by a collective labour agreement, the 20% cap does not apply on an individual basis, but it applies to the average bonus of such staff collectively, provided that individually a 100% bonus cap applies;
(b) for staff predominantly (at least 50% of their time) working outside the Netherlands, but within the EEA, an individual bonus cap of 100% applies;
(c) for staff predominantly (at least 50% of their time) working outside the EEA, an individual bonus cap of 200% applies, subject to shareholder approval and procedure pursuant to CRD IV (referred to above).
(d) for staff working at an international holding company of a financial enterprise with its official seat in the Netherlands, but with its activities predominantly outside the Netherlands, a bonus cap of 100% applies provided that within any period of five consecutive years at least 75% of all staff belonging to the international holding company's group work outside the Netherlands for three years.
(e) the bonus cap is not applicable to Alternative Investment Fund Managers and managers of UCITS.
Furthermore, the bonus cap rules are also not applicable to branches of credit institutions and investment firms with their official seat in the EEA.
However, Dutch subsidiaries of foreign companies that qualify as an financial enterprise do have to comply with the ARPFE, including the bonus cap rules.
Which cap on which bonus?
With the CRD IV bonus cap entering into force as of 1 August 2014 and the expected entering into force of the ARPFE as of 1 January 2015, financial enterprises will have to consider which bonus cap to apply to which bonus:
- for credit institutions and investment firms, the CRD IV 100% bonus cap will apply to the 2014 bonuses, to be paid in 2015; and assuming the ARPFE comes into force as per 1 January 2015, for financial enterprises (which includes credit institutions and investment firms), the relevant bonus cap pursuant the ARPFE will apply to the 2014 bonuses, to be paid in 2015.
- However, the ARPFE does provide for a transitional regime which allows the 2014 bonus, payable in 2015, to be paid without taking into account the ARPFE bonus cap rules if the award of such 2014 bonus arises from an obligation of the financial enterprise that existed prior to 1 January 2015. This may lead to considerable difficulties in the event the 2014 bonus is (fully) discretionary and not based on an existing obligation. The Dutch Central Bank has not yet provided any guidance on this.
1. For further information on those criteria please see the eAlert "EU bonus cap rules: final EBA proposals on staff caught".
2. In anticipation of such update of the renumeration guidelines, on 18 October 2014, the European Banking Authority published its opinion on whether fixed pay allowances can be classified as fixed remuneration. For further information on those criteria, please see the eAlert "EBA clears properly structured fixed pay allowances".