A bill implementing the Capital Requirements Directive (CRD IV) into Dutch law was recently submitted to the Dutch parliament. It will have a considerable impact on banks and certain investment firms. The 1 January 2014 implementation deadline was missed, but this implementing bill is now expected to come into force in mid-2014.
The implementing bill prohibits distributions undermining the capital buffers, increases the maximum fine, introduces a bonus cap and eases the obligation for CET1 capital reductions to obtain a statement of no objection. It furthermore extends the powers of the Dutch Central Bank (DNB) to take measures, and it changes the restrictions for significant banks and investment firms on the maximum number of positions that managing and supervisory directors may hold. In addition, the implementing bill imposes an obligation on DNB to draw up resolution plans for banks and certain investment firms. Banks and certain investment firms also have an obligation under CRD IV to draw up recovery plans, but this obligation will be laid down in the Prudential Rules Decree.
A number of changes that the implementing bill will bring about are discussed below, as well as some effects of the EU regulation corresponding with CRD IV, the Capital Requirements Regulation (CRR). CRR came into force on 1 January 2014 and has direct effect. On the same date, CRD IV and CRR related rules of the Dutch Central Bank took effect. These set out the choices made with respect to those options and discretionary powers under CRR that are directly addressed at DNB.
Prohibition on making distributions undermining the capital buffer
Under CRR, 4.5% of the own funds of banks and certain investment firms under CRR must consist of Common Equity Tier 1 capital (CET1 capital). In addition, the implementing bill introduces the following capital buffers:
- a capital conservation buffer equal to 2.5% of the total risk exposure amount
- a countercyclical capital buffer to absorb market fluctuations (0 – 2.5% of the total risk exposure amount). The exact percentage will be determined for each specific bank or investment firm and is a weighted average of the geographical distribution of the bank or firm's risk exposure
- a systemic risk buffer imposed on systemically important banks and investment firms (1 – 3.5% of the risk-weighted assets)
- a systemic risk buffer to absorb risks arising from (non-cyclical) macro-economic developments (1 – 3% of the relevant exposures). The Netherlands used the member state option here of introducing a systemic risk buffer. This buffer has been in place since 1 January 2014. But it does not lead to any additional requirements in the short term, as the required buffer until 1 January 2016 is 0%.
Under current law, a statement of no objection from DNB is required for reductions of own funds. CRD IV introduces a ban on making CET1 capital distributions if the required capital buffers are not met. Other restrictions also apply if capital buffers are not met, including limits on payment of variable remuneration. The implementing bill appears not to correspond entirely with the text of CRD IV, but we assume that this will be corrected at a later stage.
Increase in the maximum fine
The current maximum fine of EUR 4 million – or EUR 8 million in the case of a repeat offence within five years – will disappear. Instead, the implementing bill allows DNB and the AFM to impose a maximum fine of EUR 5 million for each violation or, if this is more, 10% of the total consolidated annual turnover of the group's ultimate parent company. The interpretation of the term "turnover" is based on competition practice. This change could see substantially higher fines. These could be imposed in situations such as:
- there is no proper remuneration policy. This may also become applicable to failures to comply with the new bonus cap (see below)
- standards of due care to clients are violated. This could be the case if no warning was issued about unsuitability of a financial service, insufficient information was gathered or provided, or the ban on inducements was violated
- trading takes place using inside information.
Failing to meet solvency and liquidity requirements also becomes punishable by a new, potentially much higher fine. But it is less likely that supervisors will impose this fine if solvency or liquidity requirements have not been met on a consolidated basis, as this would, in fact, undermine the company's solvency or liquidity position, or both.
Introduction of a bonus cap
After the implementation of CRD IV there will be a cap on the variable remuneration of certain employees of banks and investment firms (the bill inadvertently does not restrict the application of this cap to "certain investment firms"). This cap is 100% of the fixed remuneration (or 200% if the shareholders or members agree). This bonus cap will apply to employees whose work may significantly affect the company's risk profile, including employees with a higher managing, risk-taking or controlling position and certain other employees with the same or higher remuneration. The Dutch government intends to go further than CRD IV and wants to introduce a 20% bonus cap as of 1 January 2015. At the end of last year, a consultation was held on the text of a bill to that effect.
Statement of no objection only for CET1 capital reduction
Under current law, any reduction in a bank's own funds requires a statement of no objection from DNB. DNB interprets "own funds" here as the entire regulatory capital. After implementation of CRD IV, this obligation will apply only to reductions of CET1 capital (mainly ordinary share capital).
Extension of DNB's powers to take measures
In addition to existing powers, the implementing bill introduces new measures that DNB can take when specific rules have been violated. DNB can:
- require that a DNB representative is at the company at all times
- require termination of activities that carry an excessive risk to the company's solidity
- prohibit or limit distributions or payments on supplemental capital instruments
- suspend voting rights of shareholders
- exclude those who instructed or actually directed the offending conduct from holding positions at banks or certain investment funds or at their group companies. This type of exclusion can be imposed for a maximum period of one year and be extended once by the same maximum period
The implementing bill shows that DNB will not only have discretionary power, but must in certain instances require a higher required own funds or liquidity, e.g., where:
- a bank or investment firm (it is unclear if the bill intends to address "certain" investment firms only) fails to have in place required governance arrangements
- risks are not covered by the required own funds
- risks are underestimated
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.