Brexit: will PM Rutte open the door to British bankers?

Thanks to the Brexit, the Netherlands has suddenly emerged as a likely candidate to take over London’s position as the financial centre of Europe. The business climate here is good, the Dutch speak their languages and they have a good work ethic. But there is a dark cloud hanging over this scenario: the bonus cap for the financial sector of 20% of the fixed annual salary.

Generous bonuses were very common in the financial sector and we also see this in neighbouring countries now, where the bonuses granted are usually equal to the European maximum of 100% of the annual salary (in exceptional cases even increased up to 200%). Rutte stated in his weekly press conference on 1 July that the rules governing the bonus cap have ‘some flexibility’, suggesting that British bankers could possibly receive a higher bonus.

The Financial Undertakings (Remuneration Policy) Act (Wbfo) was introduced and incorporated in the Financial Supervision Act (Wft) with great fanfare at the beginning of 2015. The bonus cap of 20% forms part of this law. The idea behind the law was that bonuses could result in incentives with undesirable effect (which were partly to blame for the crisis) and that society must be protected against this. The Government believes that the European maximum of 100% does not go far enough. At the time, Dijsselbloem stated:

‘Over the past years the financial sector has depended on support from taxpayers and consumers. In my opinion, the new European rules to curb bonuses do not go far enough. So, I would like to tighten the rules in the Netherlands where possible. Excessive bonuses focussing on the short-termism and severance payments are no longer realistic.’

The law even includes an anti-abuse provision that prohibits financial undertakings from using constructions or methods that lead to circumvention of the remuneration rules, and this includes the bonus cap.

As Rutte rightly stated, there are some exceptions to the 20% bonus-cap rule so that higher bonuses can be paid out:

1. Financial and other undertakings with a corporate seat abroad do not fall under the scope of the Financial Undertakings (Remuneration Policy) Act, unless a) this concerns a subsidiary of a financial undertaking that has its seat in the Netherlands or b) if it is part of a group that has its seat in the Netherlands and the group’s main activities are part of the financial sector.
2. A layered bonus cap has been opted for: a cap of 20% for employees in the Netherlands, 100% for employees working mainly in the European Economic Area (EEA) and up to 200% for those working mainly outside the EEA.
3. Managers of investment institutions and managers of institutions for collective investments are subject to a bonus cap.
4. A cap of 100% of the fixed annual remuneration applies to employees in the Netherlands for whom the remuneration is not or not exclusively governed by a collective labour agreement, provided that the average variable remuneration of the whole group of these employees in the Netherlands does not exceed 20%.
5. Branch offices in the Netherlands of banks or investment companies that have their corporate seats abroad do not fall under the Dutch rules. In the light of the European reciprocity, they fall under the CRD IV directive governing capital requirements and consequently they are, in principle, subject to a cap of 100% unless the country of establishment has more stringent rules. This exception does not, however, apply to other branch offices, such as those of insurance companies. At the time, the Minister admitted that extending the scope of the bonus cap to include these branch offices (not of banks or investment companies) was going too far but that the goal envisaged (protection of the consumer), in his view, justified application of the 20% cap.
6. Regarding loyalty bonuses in respect of long-lasting organisational changes, the exception may be applied only after permission has been given by the regulatory body, which will not often occur.

It seems that Rutte is explicitly encouraging London banks to make use of these exceptions. The exceptions 1 through 4 and under 6 do not seem very suitable. As soon as foreign banks incorporate an entity here, they will be deemed a financial undertaking with a corporate seat in the Netherlands and therefore fall under the scope of the Financial Undertakings (Remuneration Policy) Act. Exception 4 will probably not occur often because, according to the legislature, this must relate to exceptional cases, such as an external ICT expert that is hired to resolve acute ICT problems. The legislature has stated that this exception may not be applied primarily to increase the variable remuneration of the management board. It therefore seems as if this should apply as much to other staff holding senior positions, although the legal boundaries will probably be challenged in practice. What’s more, a motion has been passed (motion Nijboer) on the basis of which the Government must closely monitor that this is not being abused. The exception for loyalty bonuses does not have a structural character and it also requires the cooperation of the regulatory body, and it seems unsuitable for this reason. This could mean that the exception under 5 has the most chance of succeeding, even though a branch office is not always the most ideal business model.

Apart from this: despite the above obstacles and even though the exceptions have been laid down by law, Rutte’s call seems to be somewhat opportunistic. After all, last year the Government was prepared to do everything necessary to curb the bonuses. It even went as far as including an anti-abuse provision in the law to this end. Rutte’s call does stand at odds with this and the question is what message this sends to other Dutch financial companies. They will probably feel that Rutte, in making such call, has created a biased playing field.

Nonetheless, it goes without saying that for ‘BV-Nederland’, I too hope that the European financial heart moves to our country. Perhaps the most simple solution is to let go of the 20% bonus cap for all companies and to increase it to 100% as is the case in the rest of Europe. This does not necessarily compromise the other stringent conditions laid down in the Financial Undertakings (Remuneration Policy) Act regarding the granting of variable remuneration.

Boudewijn Kanen

credits to Elsevier.nl for the photo.