Even though the Dutch Financial Markets Amendment Act 2014 is still pending in the Lower House (Tweede Kamer), a consultation document for the Dutch Financial Markets Amendment Act 2015 (Wijzigingswet Financiële Markten 2015, "Amendment Act 2015") was already published on 14 August 2013. The consultation document is part of an annual legislative cycle and contains changes of the Dutch Financial Supervision Act ("DFSA") and other legislation on the financial markets.
The Amendment Act 2015 contains a number of (but not all) elements discussed in the legislation letters that the Authority for the Financial Markets (Autoriteit Financiële Markten, "AFM") and the Dutch Central Bank (De Nederlandsche Bank, "DNB") sent to the Minister of Finance this summer, which has become common practice. These letters contain legislative proposals from AFM and DNB to supplement and amend the laws and regulations regarding the financial markets. The Minister of Finance gave his reaction to these legislation letters on 8 July 2013.
This newsletter firstly discusses the Amendment Act 2015. Subsequently, the legislation letters of the AFM and DNB and the reaction of the Minister thereto will be summarized. It is not evident that all proposals of the AFM and DNB will lead to alteration of existing laws and regulations. In addition, any possible implementation of new laws and regulations may take a significant amount of time. Nevertheless, the legislation letters provide an interesting indication of likely developments in the financial sector.
Consultation Financial Markets Amendment Act 2015
The Amendment Act 2015, which will enter into force on 1 January 2015, will bring several changes to existing Dutch regulatory legislation. The consultation document from 14 August 2013 implements some elements from last year's coalition agreement and this summer's legislation letters from AFM and DNB. Two of the important changes contained in the Amendment Act 2015 are the extension of the scope of the suitability and integrity test and the extension of the scope of the so-called bankers' oath to a broader group of persons active in the financial sector. Below we will elaborate on these two proposed changes.
In addition to the above, the consultation document concerns the abolition of government contribution to funding of supervision of the financial markets, modernization of the right of collection of premium contribution by insurance brokers and new rules on registered covered bonds. Furthermore, supervision on accounting firms (including disciplinary rules for accountants) and the Money Laundering and Terrorist Financing Prevention Act are also part of the Amendment Act 2015.
Extension of the scope of suitability testing and integrity testing
Currently, the DFSA contains integrity requirements (betrouwbaarheidseisen) and suitability requirements (geschiktheidseisen) for daily policymakers (such as executive board members) and internal supervisors (such as supervisory board members) of licensed financial undertakings. The applicable Dutch regulator, AFM or DNB, establishes whether these persons meet suitability and integrity requirements before they may be appointed. Furthermore, also co-policymakers of licensed financial undertakings (such as executive board members of certain shareholders) are subject to an integrity test to be performed by the AFM or DNB.
The consultation version of the Amendment Act 2015 extends the aforementioned integrity and suitability requirements to persons working for a bank or insurance company who are (ultimately) responsible for transactions which - because of the financial risks relating thereto - can substantially influence the risk profile of the bank or insurance company in question. Persons that meet this criterion are for instance the managers of a department that executes these transactions, such as a head of the asset management department or treasury department. By requiring that these positions are held by persons that meet suitability and integrity standards, the legislator hopes to ensure that no risks are taken that may endanger the stability of and trust in the financial sector.
The integrity requirements that currently apply to executive board members and supervisory board members will also apply to the aforementioned persons. However, the consultation document indicates that the initial integrity test performed by DNB will be less extensive than the integrity test for executive and supervisory board members. The explanatory memorandum to the consultation document refers to 'minimal testing'. Should the minimal test give cause for further investigations, it will be in DNB's discretion to do so.
According to the consultation document, 'suitable' means that the persons responsible for the abovementioned risk bearing transactions have sufficient knowledge, skills and are sufficiently professional to perform their position. It is expected that DNB will provide further details on the standards that should be taken into account for the suitability test in the existing Policy Rule on suitability 2012 (Beleidsregel geschiktheid 2012). Contrary to the integrity testing with regard to executive and supervisory board members which is performed by DNB, the consultation document indicates that it is the financial undertaking that is primarily responsible for performing an integrity test on persons responsible for risk bearing transactions. DNB, as the primary regulator for banks and insurance companies, will in principle not perform a full suitability test before a person may be appointed. DNB's supervision to compliance with this suitability requirements can therefore be based on a risk assessment of the specific circumstances. The explanatory memorandum indicates that DNB may perform a 'quick scan' (e.g. by means of training certificates) in the course of the minimum testing on integrity mentioned above. Such a 'quick scan' may in certain instances give rise to full suitability testing by DNB.
The new rules on the integrity test and suitability test will initially only apply to banks and insurance companies. However, the legislator can extend the scope of these rules to other financial undertakings by way of governmental decree, should it deem such extension necessary.
Extension of the scope of the bankers' oath
The consultation version of the Amendment Act 2015 also extends the obligation to take and comply with the so-called bankers' oath (currently applicable to daily policymakers and internal supervisors) to the following categories of persons:
i.The aforementioned persons who will also become subject to the extended suitability and integrity requirements, i.e. persons working in a bank or insurance company who are responsible for transactions involving large risks. The oath or promise to be taken/made by these persons will be part of the suitability test.
ii.(Other) employees of financial undertakings that perform activities which can substantially influence the risk profile of the undertaking or activities which directly relate to offering financial services. The oath or promise that these persons take/make, will be part of the requirement to maintain a controlled business and sound operational practices.
AFM legislation letter 2013 and response Minister of Finance
General - limited needs
The AFM indicates in its legislation letter that in recent years many of its proposals have already been transposed into laws which have come into effect. As a result, the AFM currently has less need for extensive new powers. Hence, the AFM wishes to draw the attention of the Minister of Finance to certain general topics only.
Disadvantages and risks of European maximum harmonization
The AFM notes that European rules increasingly provide for maximum harmonization. Consequently, there is less room to implement 'own' wishes in national laws and regulations. From the perspective of supervisory convergence, the AFM deems this a positive development. However, the AFM requires attention to the following issues:
- Sector specific European rules: European rules are drawn up largely sector-specific. The AFM warns in this context for the risks of the emergence of large differences in the way certain similar subjects are dealt with in different sectors which results in an unlevel playing field. Because European rules increasingly provide for maximum harmonization, national sector-wide regulations are excluded. According to the AFM, examples of topics in which the Dutch sector-wide supervision is crossed by the European sectoral approach are: (i) the remuneration policy, (ii) suitability of policy- and co-policymakers, (iii) complaint handling, and (iv) professional requirements. The Minister intends to explore, in consultation with the AFM and DNB, possibilities to ensure that the DFSA remains an appropriate legislative framework in which national and European can be implemented without any problems.
- Impairment consumer protection: As according to the AFM part of the European rules negatively impact the national regulations, the protection level of Dutch consumers is at stake. As an example, the AFM refers to the original European Commission proposal in relation to the Mortgage Credit Directive in which the professional requirements applicable to advisors are considerably lower than the professional requirements for advisors under current Dutch law. In addition, the AFM fears that the European rules negatively impact the steps that the AFM has achieved at a national level, such as at the product development process, the ban on commission, professional requirements and publications of fines. The Minister notes that he will continue his efforts in Europa to maintain the high level of consumer protection that applies in the Netherlands.
- Market conduct supervision within the banking union: The AFM prefers that the banking union will be designed in such way that in practice it will not hinder the effective application of current and existing market conduct regulations. The AFM emphasizes that the market conduct supervision must also be enshrined in the banking union. Examples of relevant areas in this respect are: the remuneration policy and cooperation in assessing suitability and trustworthiness of policymakers and supervisory bodies and information exchange. The Minister noted that this subject has his attention.
- Future wishes: Currently, studies are being conducted by the AFM on various topics which may result in future legislative wishes of the AFM. These studies relate to (i) complaint handling, (ii) suspension of members of the board and the supervisory board in relation to reassessment of their suitability and trustworthiness and (iii) transparency about the total cost of ownership (TCO).
- Financial reporting: The AFM considers it necessary to discuss with the Ministries of Finance and Security & Justice certain topics related to financial reporting, i.e. (i) the wide possibilities to rely on exemptions from financial requirements and (ii) the absence of a statutory obligation in respect of the formation of certain revaluation reserves. The Minister of Finance announced that some elements will be included in the revision of the accounting directive and in the Amendment Act 2015. The other wishes of the AFM with regard to financial reporting will be discussed with the Ministry of Security and Justice.
DNB legislation letter 2013 and response Minister of Finance
The DNB legislation letter is far more extensive than the AFM legislation letter. DNB refers to certain current developments, reiterates a few previously formulated legislative wishes and provides an overview of new legislative wishes which she requires to be able to properly exercise her supervisory tasks.
- Single Supervisory Mechanism: The role and position of DNB will change with the formation of the banking union. Duties and responsibilities will shift to the ECB. Simultaneously, DNB believes that national supervisory authorities, because of the importance of local expertise, proximity in the performance and knowledge of local laws, will continue to have an important role. In that respect, DNB is of the opinion that clear arrangements on cooperation between the ECB and national supervisory authorities, allocation of tasks and organizational structure are required to guarantee effective supervision. The Minister acknowledges the importance of swiftly reaching agreement on a well thought-out formation of a European banking union.
- Insurance supervision: With a view to the continuing uncertainty on Solvency II, DNB is delighted with the national developments in the field of supervision on insurers. In that respect, DNB points to the Own Risk Assessment and the Declaration of No Objection at the payment of dividends. In addition, DNB embraces the European consultation paper for the Preparatory Guidelines of EIOPA dated 27 March 2013. The Minister notes he will await the final Preparatory Guidelines before looking at whether and, if so, how the Decree on Prudential Rules should be amended.
Previous legislation wishes
Some legislative wishes and proposals in relation thereto provided by DNB in previous legislation letters have not yet led to actual legislative initiatives of the Minister. Reason for that is further consultation was required and further studies have been performed. As DNB considers progress on these topics important, DNB once more explicitly brings certain developments and required next steps to the attention of the Minister.
- Intervention Act - trigger event provisions: DNB pleads for an expansion of the scope of the trigger event provisions as set out in the Intervention Act. The Intervention Act provides that in respect of a financial enterprise or an enterprise belonging to the same group it is not possible to invoke a notice requirement or obligation to provide information in relation to specific events as set out in the Intervention Act. Reason for this is that publicity thereof would interfere with an effective intervention. According to DNB, the relevant trigger event provisions of the Intervention Act should not only relate to measures resulting from the Intervention Act, but should relate to all supervision measures that DNB may take on the basis of the DFMA. The Minister indicated that the concept of the Bank Recovery and Resolution Directive provides for an extension of the trigger event arrangements to 'crisis prevention measures'. The Minister will implement this expansion into national law.
- Declaration of No Objection requirement for dividend payments by banks: The current statutory rules provide that a bank requires a declaration of no objection (DNO) for the reduction of its equity by capital repayment or payment of reserves. The current definition of capital does not include interim profits that have not yet been adopted by an accountant and adopted profits and end-of-year profits in relation to which it has been decided to directly provide these profits as dividend payment. As a result currently no DNO is required for the payment of such profits. DNB suggests to extend the DNO-requirement for all distributions of banks to holders of capital instruments. The Minister made the commitment to amend the DFSA in line with DNB's suggestion.
- Suspension of members of the board and the supervisory board: DNB assesses the suitability and trustworthiness of directors and supervisory directors of financial enterprises. These assessments take place prior to the appointment and, to the extent reasonably required, after such appointment (reassessment). Again, DNB requests to investigate whether it would be possible to, in the event of serious incidents in relation to directors and supervisory directors, suspend such director or have such director suspend by the relevant company during a reassessment procedure. The Minister is of the opinion that the DFSA provides DNB the authority to issue an instruction entailing the request to suspend the relevant person if DNB has doubts in relation to the trustworthiness of a director or supervisory director. According to the Minister it is not yet necessary or desirable to prepare rules on which basis a similar instruction can be issued when doubts exist in relation to the suitability of a director or supervisory director. The Minister, however, noted that he would like to continue the discussion on this subject.
- Investment firms from non-EEA countries; compulsory establishment in the Netherlands: DNB reiterates that it is very difficult for her to adequately perform prudential supervision on investment firms domiciled in non-EEA countries (third countries) if such firm has no branch in the Netherlands. Often, these firms are part of larger multinational (financial) groups. Therefore, DNB requests that investment firms domiciled in non-EEA countries, wanting to perform investment services and/or investment activities in the Netherlands, will be required to set up a Dutch branch. This is consistent with the requirements for banks from third countries which are active in the Netherlands. According to the Minister, DNB's request is too far-reaching and is therefore not included in the implementation proposal regarding the capital requirements directive (CRD IV).
- Other: DNB refers to and gets back on ongoing
discussions and legislative wishes in relation to:
- Payment transactions: The supervision on payment transactions needs to be tightened up. The Minister wants to continue discussions with DNB in relation to this subject. The consultation document of the Amendment Act 2015 already contains several measures that should enhance business operations and good functioning of payments.
- Portfolio transfer by insurers: Dynamic assessment in relation to a portfolio transfer by insurers. The Minister will comply with that request. The Minister suits the action to the word in the consultation document of the Amendment Act 2015.
New legislation wishes
The developments in the financial sector give rise to DNB for new legislative wishes to be able to continue its supervision.
- Intervention Act - alteration: DNB requests to take into account the following four items in the evaluation of the Intervention Act:
i.use of the transfer instrument vis-à-vis the parent company (holding) of a bank or insurer;
ii.better alignment of the criteria for intervention by the Minister of Finance and DNB under the Intervention Act;
iii.consideration of the tension between effective crises response on the one hand and correctly and timely informing the markets and counterparties on the other hand;
iv.set up a separate governmental decree, which deals with the establishment of a bridge institution.
The Minister will take these points into consideration in the evaluation of the Intervention Act.
- Publication of financial information (including solvency and liquidation ratios): DNB suggests to proceed with publication of static key data of individual banks and pension funds on DNB's website. This concerns the publication, at least once a year, of figures and key ratios relating to, amongst others, the assets and liabilities of banks with statutory seat in the Netherlands, including their solvency and liquidity ratios. The Minister will explore these publication possibilities in consultation with DNB.
- Covered bonds: In the Netherlands, up to now covered bonds fulfil a limited role in the funding needs of banks. Amendments in applicable regulations may make this product more interesting and attractive and as a result contribute to a more diversified funding of banks. Therefore, DNB requests to implement proposals in relation to covered bonds together with the Minister and in close cooperation with the financial sector. The Minister agrees with this request. The consultation document of the Amendment Act 2015 provides for a legal framework for covered bonds on legislative level, which enables enhanced supervision on covered bonds.
- Implementation Deposit Guarantee Scheme: DNB requests a legislative amendment, in the near future, in relation to the revision of the financing of the deposit guarantee scheme leading to introduction of an ex ante fee to DNB for the funding of the costs of the deposit guarantee scheme. DNB considers it important to already provide clarity in relation to the entering into effect of the ex ante deposit guarantee scheme. The Minister notes that the Decree ex ante Deposit Guarantee Scheme will enter into effect as per 1 July 2015. The Minister will consult with DNB which solution is feasible for the interim period.
- Declaration of No Objection requirement for the issue of an exemption from the obligation to file and publish financial statements and similar corporate guarantees: DNB does not oppose the granting of 403-statements (leading to consolidated filing and publishing of financial statements). DNB is of the opinion, however, that the financial interdependencies created by such 403-statements and similar group guarantees can lead to significant prudential risks. Such interdependence also complicates any possible settlement of a company in distress. Therefore, DNB feels that it should play an explicit role in the provision of 403-statements and similar group guarantees for the benefit of financial enterprises that are supervised by DNB. According to the Minister, this topic will be taken into consideration with the evaluation of the Intervention Act.
- Other: In addition to abovementioned
legislative wishes DNB also has the following requests:
- Designated Authority: DNB wishes to be appointed as 'designated authority' for the purposes of macro-prudential instruments as listed in the Capital Requirements Regulation (CRR). The Minister notes that in the implementation proposal Directive CRD IV, DNB is appointed as 'designated authority'. In addition, it will be considered how the involvement of the Minister of Finance can be shaped.
- LTV / LTI instruments: DNB requests a recommendation authority in the decision-making process regarding the application of the Loan-To-Value (LTV) and Loan-To-Income (LTI) instruments.
- Sanctions Act 1977 - power to give instructions: DNB wishes to extend its supervisory instruments under the Sanctions Act 1977 with the power to give instructions. The Minster agrees to this request and will discuss this matter with the Minister of Foreign Affairs.
- Policymakers trust offices: DNB requests to add to the Trust Offices Act the requirement for trust offices to have a minimum of two natural persons acting as day-to-day policymaker. The Minister agrees to this request, unless it appears that the proposed revision of the Regulations governing Sound Operational Practices under the Trustees Act, which includes a reinforcement of the compliance function, adequately covers this risk; and
- Information sharing AFM and DNB regarding accounting firms: DNB requests to add to the Audit Firms Act a provision on which basis the AFM may share confidential supervisory information with DNB. The Minister will incorporate this in the consultation version of the Amendment Act 2015.
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.