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Broad interpretation exception in favor of higher bonus cap

23 March 2017

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More than two years ago, a 20% bonus cap has been introduced in the Dutch Financial Supervision Act (Wet op het financieel toezicht).

The variable remuneration may not exceed 20% of the fixed remuneration in the respective year. However, the legislator has allowed some exceptions, in which case a financial institution may apply a bonus maximum of 100% or in some cases even 200% of the fixed remuneration. These higher rates are based on the bonus caps in the European Capital Requirements Directive IV ("CRD IV").

One of the exceptions concerns financial institutions with an international character and an office in the Netherlands (section 1:121 lid 5 FSA). These are international groups of companies, whose parent company is based in the Netherlands and the employees of the total group work mainly abroad (over 50% of their time). The exception applies if at least 75% of the total staff of the group in three of the previous five years (the three years do not have to be consecutive) worked outside the Netherlands. The financial institution must fulfill these criteria each year in order to qualify for the exception in favor of a higher bonus cap.

Financial institutions that were not existing five years on February 7, 2015 (the date on which the bonus cap became effective) could not rely on that exception at the time. This follows from the legislative history, but the Dutch Central bank (De Nederlandsche Bank ''DNB'') has now repeated this in a statement and clarified that five years should be looked back from the time the parent company invokes the exception.

Further DNB has explained that the Dutch parent company (which is the group head) should be the top company within the European Economic Area (EU Member States plus Norway, Iceland and Liechtenstein, "EEA"). The parent company in the EEA does not be the top company on a global scale.  Thus, the parent company of a group of companies based in the Netherlands and head of the European group can invoke the exception, even if there is a higher holding outside the EEA. The Dutch parent company itself does not need to have a Financial Supervision Act License for example for the capacity of bank or investment firm, but it is possible.

It is expected that due to the broad interpretation by DNB more international financial institutions will invoke the exception under section 1:121 paragraph 5 FSA. This is also interesting for parties who consider to enter into the Dutch (financial) market; a holding does not need to be established in the Netherlands for three years in order to use the exception. As long as the holding existed in the previous five years and fulfills the relevant conditions, it is allowed to invoke the exception. In that case, the bonus of the staff of the Dutch parent company may not exceed 100% of the fixed remuneration. Please note: the higher bonus cap applies only to employees of the parent company; for employees of other group entities a separate assessment (based on section. 1:121 paragraph 1- paragraph 4 FSA) has to be made per entity and / or individual in order to determine which bonus cap applies. A broad definition of 'employee' needs to be considered when applying this rule. It covers both employees and persons who are not directly employed by the financial institution, such as temporary workers, seconded workers and self-employed persons.

 
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