On 26 November 2013 the Ministry of Finance published its long expected proposal for amendment of the Dutch regulation on collected remuneration for the financial sector (the “Proposal”). With the Proposal the Ministry aims to introduce stricter rules on remuneration for employees of financial institutions, deviating from the agreed playing field at European level.
The Proposal brings the new remuneration rules in scope for virtually all financial institutions. Thus, not only for banks and insurers, but also for investment firms, financial intermediaries, clearing institutions, payment service providers and all other companies regulated pursuant to financial sector laws.
The Dutch legislation will apply for all businesses regulated in the financial sector and with corporate seat in the Netherlands. However, the law provisions also extend to the subsidiaries of Dutch parent companies, whether these subsidiaries are established in the Netherlands or anywhere else in the world. Branch operations abroad are also subject to the Dutch rules on collected remuneration. In order to enforce the rules in the widest possible sense, parent companies established in the Netherlands, even if they are not regulated (for instance through the application of the provisions on consolidated supervision), must comply with the new law provisions.
The rules on collected remuneration apply broadly to the workforce of the financial institutions concerned. The provisions are not restricted to individuals working at executive levels only or to individuals being members of the board. This means that all employees of financial institutions working in the context of the financial sector business, but also any employees working for subsidiaries in other areas not being financial sector activities are subject to the rules on collected remuneration.
One of the important anti-avoidance rules, concerns the extension of the rules to individuals working for the financial institution on the basis of other types of contractual arrangements, for instance permanently insourced individuals employed by external business outsourcing companies. This means that the scope of the remuneration rules also extends outside the group of companies working in the financial sector and being subject to the rules.
The most discussed provision of the new rules concerns the introduction of a bonus cap of 20% of fixed remuneration, rather than the agreed 100% cap for banks and investment firms in the European Directive 2013/36/EU (CRD IV). The bonus cap applies, with little possibilities for exceptions/excluding. The Proposal aims to introduce a wide range of anti-avoidance rules, in order to enforce the bonus cap as widely as possible to the businesses concerned.
Other rules applicable concern:
There are few exceptions to the rules. In summary, some of the exceptions are:
Sanctions on non-compliance are not specified specifically in this legislative proposal. However, the relevant provisions on remuneration will be embedded in the Dutch Act on financial supervision. They are placed within the context of requirements for proper governance and proper conduct of financial sector businesses. The sanctions to enforce the provisions may vary from (i) administrative fines, (ii) binding directions from the supervisory authorities, (iii) binding directions supported with penalties to the worst case up to (iv) withdrawal from licenses granted. Under CRD IV the Dutch Central Bank will even obtain the right to directly dismiss (executive) directors and others determining the daily policies within the company resulting into a direct intervention in the corporate organization of the institution concerned by the supervisory authorities. When MiFID II and MiFIR will be adopted, a similar authority on direct dismissal of directors and daily policy makers by the Authority Financial Markets will be introduced too.
It is intended that the Dutch rules on collected remuneration will enter into force on 1 January 2015. This gives companies less than a year (assuming adoption of the Proposal in April 2014 in Dutch Parliament) to implement the new rules. Grants of variable compensation in conflict with the bonus cap of 20% and made prior to 1 January 2015 may be honored during the whole year 2015 as a transitory provision.
Amendment of employment conditions
The implementation of the Proposal will in most cases force financial institutions to amend their company remuneration policy and existing employment agreements before 1 January 2015. In case the variable remuneration is not awarded solely at the discretion of the company, changes thereto are likely to qualify as an amendment of employment conditions.
In general the unilateral amendment of employment terms by an employer is subject to strict rules under Dutch employment law. Firstly, it should be assessed whether the implementation of the Proposal leads to the necessity to amend the company bonus policy. Under circumstances the Works Council might have the right of consent (art. 27 Works Councils Act).
Secondly, the Proposal should be implemented in the employment agreements with the individual employees. Dutch law provides for the following possibilities:
It follows from case law that the sole fact that an employer is forced to implement new legislation is not sufficient to allow a unilaterally imposed amendments to employment agreements or to force the employee to agree with the proposal. This rule applies in particular if it concerns important employment conditions such as remuneration. In this specific case it can however be argued that the interests of the company outweigh the interests of the employee, especially if the negative financial impact of reduced variable remuneration will be compensated by means of increased fixed salaries, introducing a 13th month etc. Since the company risks a significant fine or even withdrawal of the license to operate as a financial institution this would outweigh the interests of the employee. This is particularly the case if the employer seeks to compensate the consequences of the amendment to the remuneration paragraphs with other financial rewards.
It will therefore be key for employers introducing amendments to the remuneration framework to adopt the Proposal, to offer employees reasonable (temporarily) compensation for reduction of variable remuneration. We believe that it is an unintended and undesirable consequence of the Proposal, that employers will be faced with less flexible remuneration packages for employees and, therefore, significant higher costs for the work force. Ultimately, this may have consequences for the position of the Netherlands in the financial sector and employment opportunities.