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Supervisory authorities introduce principles for controlled remuneration policy in the financial industry

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On May 6, 2009, the supervisory authorities De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM) published principles for controlled remuneration policy in the financial industry. The principles constitute the starting points in the assessment of remuneration policy of financial undertakings. Excessive remuneration incentives are seen as one of the causes of the financial crisis.

The principles and supervision thereof therefore focus primarily on combating those incentives that may give cause to taking undesirable and irresponsible risks, which may lead to clients' interests being neglected. The principles of the DNB and AFM are in line with international developments. They are in line with and can be seen as a national elaboration of the principles for sound compensation practices of the Financial Stability Forum, which were ratified by the G20 in London on 2 April 2009. Nor are these principles to be seen in isolation in a national context: they were consciously formulated in an abstract way to provide all financial undertakings with guidelines for prudent and client-oriented remuneration policy.

Financial undertakings have to apply the principles to their situation in a concrete sense and critically assess their remuneration policy for this purpose and adjust it where necessary. The DNB and the AFM will actively monitor how financial undertakings apply the principles in their organisation. If the DNB and the AFM are of the opinion that the remuneration policy of an undertaking may cause substantial prudential and/or behavioural risks, this will lead to an investigation into the identified risks and an increased level of supervision of the undertaking as a whole. The principles will also have to be further specified on the basis of, among other things, additional investigation by the DNB into the actual remuneration situation in the Dutch financial sector, which investigation is currently underway.

In order to provide the AFM with a concrete starting point that can be applied broadly for enforcing the principles, the Ministry of Finance will arrange for clear inclusion of controlled remuneration policy in the Act on Financial Supervision.

The principles for controlled remuneration policy apply to all directors and employees whose remuneration consists, or may consist, for a significant part of a variable component. No financial undertaking is equal in nature and size, and it is therefore expected that the elaboration of the principles will differ per undertaking.

The principles relate to three levels of remuneration policy. The first level concerns the starting points. The remuneration policy of a financial undertaking should support the integrity and solidity of an undertaking in a sustained manner, and should take the interests of clients and other stakeholders into account. The second level concerns the governance of remuneration policy. It is important that sufficient attention is paid to undesirable side effects during the structuring, implementation and evaluation of remuneration policy.

The third level concerns the design of variable remuneration structures. It is important, in situations in which variable remuneration components can be substantial when compared with the fixed salary, that sufficient measures are in place to prevent undesirable incentives. The first step is the implementation of an appropriate maximum as regards the variable remuneration when compared with the fixed salary. What maximum would be appropriate depends, among other things, on the position and the extent to which other measures can be put in place to prevent the undesirable incentives. Examples include the implementation of a set of measurable performance indicators which include the interests of all stakeholders, the correction of commercial performance for risks taken, and the assessment of performance over several years.

The Committee on the Future of Banks (Maas Committee) made a number of recommendations regarding the remuneration policy for directors of banks in its recently published report. As regards this target group, the recommendations of the committee can be seen as an elaboration of the sector of the more general DNB/AFM principles which have a wider scope of application. The DNB and the AFM welcome this development and assume that it will also have its effect on the remuneration policy of the other employees of banks and on other subsectors of the financial sector.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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