Remuneration by investment firms: where do you stand?
The remuneration rules for investment firms are rather fragmented. Several regulations have to be kept next to each other for a complete picture. Especially now several changes seem to (finally) come into force. Below is a brief overview of the various regulations, whether and when they will be amended, and what investment firms can expect in the future. This blog does not summarize all the remuneration rules, but it does give you where to find them. And that is quite a lot in this case.
Financial Institutions Remuneration Policy Act
First, we have the so-called Dutch Financial Institutions Remuneration Policy Act (Wbfo). The Wbfo came into force in 2015 and is included in the Dutch Financial Supervision Act (Wft) (Sections 1:111 to 1:129 Wft). The Wbfo applies to all types of financial institutions, including investment firms.
The Wbfo obliges financial institutions to pursue a controlled remuneration policy and restricts high variable remuneration. The Wbfo includes a cap on variable remuneration at 20% of the fixed remuneration of an employee on an annual basis (the well-known bonus cap). Exceptions to this are possible, for instance for non-CAO staff or for persons who mainly carry out their work in another state or member state.
For some time now, an amendment to the Dutch Financial Supervision Act (Wbfo) with further rules regarding the remuneration policy of financial enterprises (the Dutch Further Remuneration Measures Financial Enterprises Act (Wnbfo)) has been pending in the Lower House of Parliament. It is proposed to introduce a statutory retention period of 5 years for (among others) shares and options if these are part of the fixed remuneration. The reason for this proposal is the undesirable incentive that shares and suchlike provide if they are linked to price increases in the short term. In addition, the Wnbfo contains a proposal to limit the possibility to deviate from the bonus cap for non-CAO personnel. An evaluation showed that this possibility was used too often in the eyes of the legislator.
The intended date of entry into force of the Wnbfo was 1 July 2021. This date has not been met. It is not clear when the legislative proposal will now be dealt with by the Lower House of Parliament. At the beginning of this year, the bill was declared ‘non-controversial’, which means that the resigned government can simply go ahead with the introduction. The current political deadlock should not be the cause of further delay.
MiFID, CRD, CRR, IFD and IFR
In addition to the Wbfo, European directives are relevant. The Markets in Financial Instruments Directive (MiFID II) has a few general remuneration rules that apply to all investment firms. The amended European Capital Requirements Directive (CRD) and the European Capital Requirements Regulation (CRR) contain more concrete remuneration rules for banks and certain investment firms. These rules were implemented when the Wbfo was created and in the Regulation on Sound Remuneration Policies 2017 (Rbb 2017) of De Nederlandsche Bank N.V. (DNB).
Recently, another new European prudential framework for investment firms, the Investment Firm Directive (IFD) and Investment Firm Regulation (IFR), came into force. This new framework distinguishes three categories of investment firm: class 1, class 2 and class 3. Class 1 investment firms, also referred to as systemically important investment firms, are considered banks under IFD and IFR and continue to fall under CRD and CRR. Class 3 investment firms meet specific criteria in IFD. These are small, non-interfaced investment firms. Class 2 investment firms are investment firms that do not meet the criteria for class 1 and class 3.
IFD contains a new set of remuneration rules for, in particular, class 2 investment firms; class 1 investment firms are excluded insofar as they are not subject to group supervision, although they are still subject to MiFID II. The remuneration rules in IFD largely correspond to the remuneration rules in CRD, but are in principle less strict; investment firms to which the IFD applies can apply proportionality with respect to the remuneration rules and the bonus cap is absent. However, as we have already pointed out (link and link), the Dutch Investment Firms Directive Implementation Act does not introduce an exception to the bonus cap for these categories of investment firms. The main rule of a 20% bonus cap will therefore continue to apply, including to IFD investment firms.
The new rules will be implemented in Sections 1:117 and 1:121 of the Wft and in the new Regulation on Sound Remuneration Policies 2021 (Rbb 2021) (see below). This is still a while to wait. The deadline of 26 June 2021 for the implementation of IFD by the Dutch Investment Firms Directive Implementation Act has not been met. In the summer, we wondered about the timing (link). There now seems to be progress in the matter. On 14 September, it was announced that the legislative proposal will be struck down on 28 September and will enter into force shortly. If all goes well, we will not have to wait long for this new set of (remuneration) rules.
The new remuneration rules in IFD are implemented in Section 1:117 and Section 1:121 Wft and in the new Rbb 2021. The Rbb 2021 was drawn up by the DNB and the Netherlands Authority for the Financial Markets (AFM) and is the successor to the Rbb 2017. The Rbb 2021 has a new annex (B) for investment firms that fall within the scope of the IFD. In principle, this concerns Class 2 investment firms that are not designated as banks within the meaning of CRR, but are also not exempt due to their limited size. Annex (A) applies to banks and systemically important class 1 investment firms subject to CRR. There is a certain degree of overlap between the remuneration rules in Annex (A) and the new Annex (B), similar to the overlap between CRD and IFD. For example, in both Annex (A) and Annex (B), 40% of variable remuneration must be deferred over a period of 3 to 5 years.
The fact that the deadline for the implementation of the IFD has not been met also has consequences for the new remuneration rules. The Rbb 2021 will not enter into force until the Dutch Investment Firms Directive Implementation Act has been adopted. This seems to be the case in the very short term (finally).
Once the Rbb 2021 enters into force, all investment firms will have to comply with it. The IFD does not provide for transitional rules. As a result, remuneration paid in the year in which the new Rbb 2021 enters into force must also comply with the amended remuneration rules. DNB and the AFM cite as an example a performance bonus that is awarded in the spring of 2022 for the performance year 2021. In this case, the rules from Rbb 2021 apply.
ESMA and EBA Guidelines
Finally, guidance from European supervisory authorities, including the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA), should be taken into account.
On 19 July ESMA announced the consultation of the ‘Guidelines on certain aspects of the MiFID II remuneration requirements’. These guidelines replace the ‘Guidelines on remuneration policies and practices (MiFID)’ published by ESMA in 2013. ESMA’s guidelines apply to all investment firms (and certain other parties providing investment services). They are mainly an interpretation of the MiFID II requirements on conflicts of interest and corporate behaviour in the field of remuneration.
In addition, the EBA has recently published updated ‘Guidelines on sound remuneration policy’. These guidelines apply to banks, but now also to systemically important class 1 investment firms that must be regarded as banks. The guidelines will enter into force on 31 December 2021.
Finally, the IFD mandates the EBA, in consultation with ESMA, to issue guidelines on the implementation of sound remuneration policies. This guidance would apply to the investment firms to which the remuneration rules in IFD apply (in particular, class 2 investment firms).
It therefore seems that investment firms will soon have to take account of a set of guidelines. For systemically important class 1 investment firms, the ESMA and EBA guidelines on sound remuneration policies will apply and for other investment firms the ESMA and the new EBA guidelines.
Do you know where you stand? Hopefully this blog will help. Or the schematic overview of the applicable remuneration rules below. If you have any questions, please do not hesitate to call us, we will be happy to help you further.
 Directive (EU) 2014/65.
 Directive (EU) 2013/36.
 Regulation (EU) 2013/575.
 Directive (EU) 2019/2034.
 Regulation (EU) 2019/2033.