New remuneration rules under IFD/IFR and the impact for Dutch investment firms

The new harmonized prudential framework for investment firms is a fact. The rules laid down in the Investment Firms Directive[1] (IFD) and the Investment Firms Regulation[2] (IFR) will be applicable as of 26 June 2021. Investment firms should start preparing for these new rules. Part of the package are the remuneration requirements for certain types of investment firms. What changes do investment firms authorized in the Netherlands need to anticipate? And will the new rules actually make a big difference in practice if we consider the relatively strict Dutch remuneration rules that are already in place? The Dutch remuneration rules have a broad scope and apply to all Dutch financial undertakings, including investment firms. For many Dutch firms, things may not be as black as they seem.

What is IFD/IFR and which investment firms are covered?

IFD/IFR will apply to all investment firms authorized in the EU under MiFID II.[3] With IFD/IFR a new classification system for investment firms is introduced. This classification system contains many nuances (which will not be discussed here), but one can roughly distinct between the following three classes of investment firms:

• Class 1: systemically important and larger investment firms, which will be treated as credit institutions.
• Class 2: large and interconnected investment firms that do not fall in Class 1 or Class 3.
• Class 3: smaller and non-interconnected investment firms that meet specific criteria laid down in Article 12 IFR (for example: assets under management (AUM) of less than EUR 1.2 billion and daily client orders handled (COH) less than EUR 100 million (cash trades) or less than EUR 1 billion (derivatives)).

Class 1 firms will remain subject to the regime as laid down in CRD[4]/CRR[5]. Class 2 and Class 3 firms will fall under the scope of the prudential regime as laid down in IFD/IFR.

The IFD rules on remuneration in a nutshell

The remuneration rules for Class 2 investment firms can be summarized as follows:

• Article 30 IFD on remuneration policies: specific conditions will apply as to the remuneration policies for identified staff, including for example the new requirement that the remuneration policy shall be gender-neutral.
• Article 31 IFD on public financial support: an investment firm that benefits from extraordinary public financial support cannot pay variable remuneration to the members of the management board and variable remuneration paid to other staff members must be consistent with the maintenance of a sound capital base and timely exit from such extraordinary public financial support.
• Article 32 IFD on conditions for the variable remuneration: specific conditions shall be met when awarding and paying bonusses, including, for example, that at least 50% of variable remuneration shall consist of shares or other instruments and at least 40% of variable remuneration shall be deferred over a three to five year period as appropriate.
• Article 33 IFD on the remuneration committee: a gender balanced remuneration committee will be mandatory for investment firms where the value of its on and off‐balance sheet assets is on average more than EUR 100 million over the four‐year period immediately preceding the given financial year.[6]

Proportionality [7]

The IFD requirements on remuneration leave room for a proportionality. Firstly, as a starting point Class 3 investment firms will not fall under the scope of the IFD remuneration rules.[8] Furthermore, IFD provides that the remuneration policies should be proportionate to the size, internal organization and nature, as well as to the scope and complexity of the activities of the investment firm.[9] Also, the requirements of 50% non-cash instruments and of deferral shall – in principle – not apply to firms whose value of on and off‐balance sheet assets is on average equal to or less than EUR 100 million and to staff members whose annual variable remuneration does not exceed EUR 50 000 and does not represent more than 25% of that individual’s total annual remuneration.[10]

Impact for investment firms in the Netherlands?

Most of the new remuneration requirements are familiar and in line with the rules already included in CRD, the EBA Guidelines on sound remuneration policies[11] and the national rules included in the Dutch Financial Supervision Act (DFSA) and the DNB Regeling beheerst beloningsbeleid Wft 2017. Furthermore, the novelties that we find in IFD, which mainly relate to requirements on gender neutral policies and bonusses, the thresholds for establishing a gender balanced remuneration committee and proportionality, are actually comparable to those included in the new CRD V (although not exactly the same). We recognize a largely harmonized methodology after all, despite the new classification system.

Investment firms will need to assess in which category of firms they will fall under the new regime and whether they, for example, need to establish a remuneration committee based on the new threshold criteria. Also, some investment firms may be required to amend their policies and practices to differentiate between identified staff and other staff members within their organization. Firms that already took into account the rules from CRD, Regeling beheerst beloningsbeleid Wft 2017 and the existing EBA Guidelines in drafting their current internal policies will not encounter many surprises.

Whereas the new rules may urge investment firms in other Member States to make significant changes to their policies and practices, my guess would be that most investment firms authorized in the Netherlands are not facing major changes. Since the remuneration rules, including the bonus cap of 20% and a prohibition comparable to the one in Article 31 IFD, already apply to all financial undertakings in the Netherlands[12] as well as to all staff members (instead of only identified staff), I do not expect that the IFD proportionality regime will have consequences for the actual amounts of bonus that staff members of Dutch investment firms can receive. A proportionate approach in relation to deferral and non-cash instruments is already followed in practice, but a statutory basis – either in the DFSA or delegated legislation – would provide welcome clarity on the subject.

To conclude, we will not know for sure the impact that the new rules will have on all types of firms until a consultation document or legislative proposal of the Dutch implementing act will have been published. However, with a view to the current broad scope of the remuneration rules in the DFSA, I think the changes as a result of IFD/IFR will be manageable for most Dutch investment firms.

[1] Directive (EU) 2019/2034
[2] Regulation (EU) 2019/2033
[3] Directive 2014/65/EU
[4] Directive 2013/36/EU
[5] Regulation (EU) No 575/2013
[6] The remuneration committee may also be established at group level.
[7] Again, there are nuances as to the proportionality thresholds and the scope of IFD. These nuances will not be discussed here.
[8] Please refer to Article 25 IFD for the details. Exempted firms still fall under the scope of the MiFID II remuneration rules.
[9] Article 30 (1) (a) IFD
[10] Article 32 (4) IFD
[11] EBA/GL/2015/22
[12] Please note that there is an exemption to the bonus cap for certain investment firms that only deal on own account.