At the very end of 2013, on 17 December, the final version of the Financial Markets Amendment Decree 2014 (the "Amendment Decree 2014") has been published. The final Financial Markets Amendment Act 2014 (the "Amendment Act 2014") was published only slightly earlier, on 5 December, in the Bulletin of Acts and Decrees. In this newsletter we will discuss a number of important new rules that have been included in the Amendment Act 2014 and the Amendment Decree 2014. Finally, we will point out the amended professional competence requirements that - although already included in the Financial Markets Amendment Decree 2013 - due to a transitional period, will also come into effect on 1 January 2014.
Overview of important amendments
The Amendment Act 2014 and the Amendment Decree 2014 contain, inter alia, new rules regarding:
- A general duty of care for financial services providers;
- The inducement ban for investment firms;
- Supervision of clearing and settlement institutions;
- The asset segregation for investment institutions and UCITS;
- The bank housing savings deposits;
These issues are briefly discussed below.
A general duty of care for financial services providers
In spite of the fact that the introduction of a general duty of care has led to extensive discussions in the past year, the Amendment Act 2014 introduces this duty of care for parties that qualify as financial services provider within the meaning of the Dutch Financial Supervision Act (Wet op het financieel toezicht, "DFSA"). This basically concerns the parties that offer a financial product other than a financial instrument and with respect to this product give advice, act as (reinsurance) intermediary or act as (indirectly) authorized underwriting agent. Examples of financial services providers within the meaning of the Financial Supervision Act are providers of consumer credit or insurance intermediaries.
The general duty of care requires that a financial services provider in a careful manner takes into account the legitimate interests of the consumer or the beneficiary (hereinafter referred to as the "customer"). The original legislative proposal referred to 'interests' in general terms. According to the legislator, the recent addition that it must concern legitimate interests expresses that it must concern interests that, whether or not directly, must be affected by the financial services and with respect to which it can be reasonably expected from financial services providers that they will look after these interests. For advisors the additional explicit provision has been maintained that they must act in the interest of the customer. From the original legislative proposal has been deleted that a financial services provider must refrain from any act or omission which may cause apparent adverse effects for the customer. This means that, in this respect, the legislator has responded to the criticism that this open standard would lead to too much legal uncertainty.
According to the legislator, the general duty of care for financial services providers acts as a safety net for damaging market behaviour in the field of financial services that is not (yet) covered by the existing regulations. The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten "AFM") is charged with the supervision and enforcement of the general duty of care. The original legislative proposal gave rise to concern that the AFM would soon proceed to far-reaching enforcement measures based on the open standards. The legislator has responded to this concern by stating in the DFSA that the AFM may only give an instruction in case of clear misconduct that may damage the trust in the financial services provider or in the financial markets. In addition, the legislator has stated in the parliamentary history that imposing an order subject to a penalty or an administrative fine is only possible after an instruction has been given relating to a violation of the duty of care and this instruction has not been complied with.
The inducement ban for investment firms
The Amendment Decree 2014 contains the long-announced inducement ban for investment firms. The ban will be included in the Market Conduct Supervision (Financial Institutions) Decree (Besluit Gedragstoezicht financiële ondernemingen Wft). It regards further substantiation of the contents of the general duty of investment firms, to act honestly, fairly and professionally in accordance with the best interests of the client, when providing investment or ancillary services. For a detailed explanation of the inducement ban for investment firms we refer to our specific newsletter> on this subject.
Supervision of clearing and settlement institutions
Clearing and settlement institutions will be under legal supervision based on the Amendment Act 2014 and the Amendment Decree 2014. In brief, a clearing and settlement institution is engaged in handling cashless payments. This involves handling payment orders, forwarding requests for authorization and the authorization.
Until now, the supervision of these companies was only conducted on a voluntary basis. But in view of the increasing number of cashless payments in the Dutch market and the attendant risks, the legislator believes that formalization of the supervision is required.
Based on the Amendment Act 2014, clearing and settlement institutions require a licence from the Dutch Central Bank (De Nederlandsche Bank) to provide their services and will be subject to ongoing supervision of DNB and the AFM.
Asset segregation for investment institutions and UCITS
The rules for asset segregation for investment institutions (and in the same manner for undertakings for collective investment in securities, referred to as "UCITS") are made more explicit in the Amendment Act 2014 and are somewhat expanded.
The Amendment Act 2014 explicitly states that the legal ownership of the assets of an investment fund (whether or not in the form of a UCITS) must be held by an entity with the sole object stated in its articles of association of keeping the legal ownership of the assets of one or more investment funds, whether or not together with the custody and administration of the assets.
In addition, the existing provisions granting priority to certain claims in relation to investment funds is declared to apply accordingly to investment companies (whether or not in the form of a UCITS). Based on the aforementioned provisions granting an order of priority, the assets of an investment institution/UCITS may only be used for claims relating to the management and the custody of the investment institution/UCITS and to the participation rights. Furthermore, the Amendment Act 2014 clarifies that as a result the assets of the investment institution/UCITS constitute a legally segregated estate.
In the consultation on the Amendment Act 2014 was proposed to also include in the DFSA that an investment company/UCITS - as is the case in respect of an investment fund - would require a separate custodian if based on the investment policy there would be a real risk that the capital of the investment firm/UCITS and the capital of the custodian would be insufficient to pay the above-mentioned claims that form part of the order of priority. Following criticism from the market on this obligation, the legislator refrained from introducing this provision.
Bank housing savings deposits
By virtue of the deposit guarantee scheme, DNB pays compensation to depositors who have a deposit with a bank that has ended up in insolvency. The deposit guarantee scheme contributes to the confidence depositors have in banks and thus to preventing a disruption of the payment system and to preventing a bank run. Due to the specific nature of related bank savings deposits, these grounds for the deposit guarantee scheme play a much more limited role in respect of the aforementioned deposits. Consequently, in the Amendment Act 2014 a choice has been made that, when a bank ends up in an insolvency situation, the bank housing savings deposits and the related debt combined become due and payable, and can be set off against one another. Usually, the deposit will be smaller than the related debt, which means that the deposit will be set at zero and the related debt will be reduced by the same amount as the amount by which the bank housing savings deposit has been reduced. The consequence is that the depositor, in respect of the bank housing savings deposit, in principle cannot claim compensation under the deposit guarantee scheme.
Date of entry into force Amendment Act 2014 and Amendment Decree 2014
The proposed date of entry into force of all the provisions mentioned in this newsletter is 1 January 2014.
Professional competence requirements
The Financial Markets Amendment Decree 2013 has already amended and tightened the professional competence system for financial service providers. The principal rule is and was that all employees who are involved in providing financial services to customers must be professionally competent. However, a new element is that the employees who advise customers about financial products must be able to demonstrate this professional competence by means of a DFSA-diploma (or a valid recognition of professional qualifications). Under the old rules, this diploma requirement did in respect of financial undertakings up to 50 employees did not apply to advisors with customer contacts, but to persons who characterize as actual managers within the financial service provider. With respect to financial undertakings with a staff of more than 50 employees, there was no diploma requirement, provided that the professional competence was guaranteed by the business procedures.
In addition to the aforementioned amendment involving the persons who must have a DFSA-diploma, the substantive requirements for the diploma itself have been altered through the Financial Markets Amendment Decree 2013, and a different system for permanent education was introduced.
Formally, these new professional competence requirements will enter into force on 1 January 2014. However, this does not mean that market parties must immediately meet these new requirements from that date:
For financial service providers that already hold a license on 31 December 2013 and that meet the professional competence requirements that applied up to that date, a transitional period applies until 1 July 2015.
If a financial service provider applies for a license to provide financial services before 1 July 2014, then such financial service provider may also benefit from a transitional period, albeit only until 1 July 2014. If, however, this financial service provider employs persons who already have a valid DFSA-diploma (or a valid recognition of professional qualifications) on 31 December 2013, then the financial service provider does not have to meet the new professional competence requirements for these persons until 1 July 2015.
Financial service providers that apply for a license after 1 July 2014 are immediately subject to the professional competence requirements.
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.