The Nederlandsche Bank is critical of the progress of the implementation of Beheerst Beloningsbeleid (sound remuneration policy) by banks and insurers. These came into effect on 1st July 2011, but DNB has given the market until 31st March 2011 to implement these rules adequately.
On 24th January DNB held an information session for banks and insurers to give an indication of what banks and insurers are expected to do in the field of sound remuneration policy.
During the information session DNB presented the results of the following investigations:
- Spring 2011: Investigation of 7 big banks and insurers
- Autumn 2011: Self-assessments by 13 medium-sized banks and 20 medium-sized insurers
It was remarkable that the AFM, responsible for supervising the sound remuneration policy in relation to the behaviour of institutions towards clients, was not involved with the presentation. Nor did DNB demand attention for the behavioural aspects of remunerations. As a result institutions could easily lose sight of this behavioural component of remunerations. Charco & Dique is of the opinion that explicit attention needs to be paid to this in the risk analysis. This applies in particular to banks and insurers, which are specifically oriented towards private clients.
It is clear that DNB will aim for the compliance of the sound remuneration policy by the institutions. In May 2012 institutions that have already been investigated will be examined again concerning this matter during the regular supervision. In addition, a new project will be started to investigate more banks and insurers.
Judgement DNB
DNB sees as a common thread that risks are not being sufficiently considered. Companies are trying too hard to adapt the existing remuneration practices and systems to the regulation.
More specifically DNB observes:
- Analysis and transparency of policy with so-called ‘identified staff’ can be more critical. DNB refers explicitly to the Q&A identified staff as described on the website of DNB.
- The way the risk analysis has been carried out is too restricted; it has to aim at actual and future risks.
- Criteria for performance need to be made more specific (in order to control the risks) with the accompanying implementation into processes and employment contracts.
- There are not enough individual (re)evaluations of conditionally granted bonuses.
- The discretionary powers of the RvC have been insufficiently shaped. These need to be organised in a more structured way.
- The current involvement of the departments risk management & compliance and the Board of Directors with the establishment and impact of the policy is too restricted.
DNB also makes concrete recommendations, for instance regarding the payment of variable remunerations with do’s and don’ts. The Do’s are in the important field of financial penalties and claw-backs on variable remunerations.
Vision & approach Charco & Dique
Charco & Dique noted similar findings in meetings with market participants. Despite the sector’s awareness of the importance of having a sound remuneration policy, the way the risk analysis is carried out is often too restricted. Nor is there sufficient translation into the way in which the organisation is set up and rewards are given.
Instead of starting to describe the remuneration policy and curbing all variable and possibly excessive components, it is wiser to start with a good analysis of the risks and the influence of rewards on those risks. For many banks and insurers this means that the prudential and behavioural risks should be clearly distinguished in the analysis. To achieve this, the departments risk management & compliance need to be heavily involved.
Only after a proper risk analysis is it possible to link the identified risks to the remuneration structure and other incentives for the distinguished functions and functionaries. After this phase it becomes clear where action needs to be taken in order to make changes.
The outlines of our methodology is represented in the diagram below.
The above clearly shows that a sound remuneration policy is an ongoing process that needs a fundamentally good approach.
Charco & Dique can independently evaluate risk analyses and propositions for sound remuneration policies that have already been completed and can make a concrete contribution to the compliance of organisations with the sound remuneration policy.