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New Remuneration Code for Dutch Banks

The Netherlands Bankers’Association (Nederlandse Vereniging van Banken or ‘NVB)’, has published a provisional banking code which is in response to the report entitled ‘Restoring Trust’ (‘Naar herstel van vertrouwen’), which was published by the Advisory Committee on the Future of Banks (Adviescommissie Toekomst Banken) on 7 April 2009.

The recommendations from chapters 1 and 2 of the Advisory Committee’s report have been used as the basis for this Banking Code. The Banking Code, which operates on a comply or explain basis, applies to all activities in the Netherlands performed by banks that are in possession of a banking licence granted under the Dutch Financial Supervision Act.

All banks shall report every year in their annual report regarding the manner in which they applied the principles of the Banking Code in the previous year, providing a substantiated explanation – where applicable – of why a particular principle may not have been applied, either partly or in full. All banks are requested to place this report on their website.

The Banking Code will come into effect on 1 January 2010. When presenting their annual report for the financial year 2009, banks have been requested to explain on their website what preparatory steps they took in 2009 to ensure that they can apply the Banking Code from 1 January 2010 onwards.

A spokesman for the Association of Dutch Shareholders has called the code a step in the right direction but criticised its approach of “comply or explain.”

Among the key recommendations of the new banking code are that:

  • A number  of members of the risk committee must have sound knowledge of the financial aspects of risk management or the experience needed to make a thorough assessment of risks;
  • The members of both the Executive Board and the Supervisory Board should follow a programme of lifelong learning, in order to maintain or improve their expertise;
  • The Executive Board shall propose the risk appetite to the Supervisory Board for approval at least once a year. Any material changes to the risk appetite in the interim shall also require the Supervisory Board’s approval

The recommendations which specifically address remuneration include:

  • The bank shall implement a meticulous, restrained and long-term remuneration policy that is in line with its strategy and risk appetite, objectives and values, taking into account the long-term interests of the bank, the relevant international context and society’s acceptance.
  • The bank’s remuneration policy shall also comprise the policy on awarding retention, exit and welcome packages.
  • The total income of a member of the executive board shall be in reasonable proportion to the remuneration policy adopted by the bank. At the time when his or her total income is decided, it shall be slightly below the median level for comparable positions in the relevant markets both inside and outside the financial sector. The relevant international context shall be a major factor.
  • The remuneration in the event of dismissal may not exceed one year’s salary (the ‘fixed’ remuneration component). If the maximum of one year’s salary would be manifestly unreasonable for an executive board member who is dismissed during his first term of office, such board member shall be eligible for severance pay not exceeding twice the annual salary.
  • Shares granted to management board members without financial consideration shall be retained for a period of at least five years or until at least the end of the employment, if this period is shorter. If options are granted, they shall, in any event, not be exercised in the first three years after the date of granting.
  • Every bank shall set a maximum ratio of variable remuneration to fixed salary that is appropriate for the bank in question. The variable remuneration per annum of members of the executive board shall not exceed 100% of the member’s fixed income.

Further Reading

New York Times, 10 September 2009

What do you think?