The Houthoff Financial Regulatory team closely monitors developments on the financial markets and within financial supervision.
On 1 July 2020, the Dutch Ministry of Finance launched the consultation of the Amending Decree Financial Markets 2021 (Wijzigingsbesluit financiële markten 2021, “Amending Decree“). The Amending Decree will amend the Decree on Conduct of Business Supervision of Financial Undertakings Wft (Besluit Gedragstoezicht financiële ondernemingen Wft, “BGfo“), the Decree on Prudential Rules Wft (Besluit prudentiële regels Wft, “Bpr“) and some other decrees relating to the financial markets. The consultation period runs until 13 August 2020.
In this News Update, we set out the most important amendments of the Amending Decree regarding automated advice, monitoring of the cost model, active transparency of commission, abolition of the knowledge and experience test, independent advice, and outsourcing. We also highlight some consultations and guidelines issued by the European supervisory authorities.
Introduction of specific requirements for fully automated advice
A definition of ‘automated advice’ is added to the BGfo. It applies if the work of the human adviser is fully taken over by an automated system. The role of natural persons with automated advice is reduced to developing the system, solving malfunctions in the IT systems and answering specific ICT questions. Automation processes that are only used to gather and analyse customer information in order to simplify or shorten the advice process do not fall within the meaning of automated advice within the BGfo definition.
In order to ensure that fully automated advice meets the same quality requirements as advice given by a natural person, a number of criteria were introduced. These relate to:
- appointing competent persons who will be ultimately responsible for the provided advice;
- determining the target group;
- analysing scenarios;
- taking into account the latest relevant knowledge;
- ceasing to use the system and informing customers after errors are identified; and
- checking whether the customer understands the type of service provided.
Reduction in audit frequency of the cost model and introduction of annual reporting requirement
Audits of the cost model will be reduced in frequency. Alternative safeguards will be introduced for the years in which no audit takes place. The financial product provider must calculate annually whether the estimated advice and distribution costs have been correctly and fully allocated to the financial product and state whether there was a material change. The auditor will perform various activities according to whether or not there was a material change.
Conversion of the current transparency obligation for non-life insurance into an active obligation
The purpose of strengthening the commission transparency is to proactively inform policyholders prior to taking out a non-life insurance policy about any closing and ongoing commission and the services provided in return. Both direct providers of non-life insurance as well as advisers and intermediaries must clarify the characteristics of their services. In addition, direct providers must disclose what they pay as a handling fee to third parties, other than to intermediaries or advisers. Advisers and intermediaries are also expected to actively inform consumers about the average closing and ongoing commission for a certain category of products. This obligation does not apply to the business market. Both business and private clients can ask the adviser or intermediary for the exact nominal amount of the closing and ongoing commission.
Abolition of the knowledge and experience test for additional credit for financing energy-saving facilities in a home
The knowledge and experience test contained in the BGfo will cease to apply if a consumer wishes to take out an additional mortgage loan of up to EUR 25,000 from the same provider via the “execution only” channel to finance energy-saving facilities in a home. This only applies to the extent that the mortgage loan is demonstrably spent on energy-saving facilities mentioned in the BGfo.
Separation between independent and dependent advice
A financial service provider who advises on certain products mentioned in the BGfo must inform consumers or clients prior to the advice whether he advises dependent or independent. If a financial service provider advises independently, he must assess a sufficient number of financial products available on the market. He may not offer financial products only offered by himself or financial products offered by entities with which he has close links within the meaning of the BGfo. This is a specification of the already existing obligation to inform clients whether or not the financial services provider advises on the basis of an objective analysis.
Provisions on intra-group outsourcing brought in line with EBA guidelines
The European Banking Authority (“EBA“) Guidelines on outsourcing arrangements issued on 25 February 2019 required the amendment of Article 32 of the Bpr. That article currently indicates that the rules set out in Articles 29 to 31 of the Bpr do not apply to intra-group outsourcing. However, under the relevant European directives, the same requirements apply to outsourcing as well as intra-group outsourcing. According to the EBA guidelines, the risks associated with intra-group outsourcing by banks, payment institutions and electronic money institutions are not necessarily lower. In view of this, the exception in Article 32 should no longer apply to these institutions and the new text repairs this non-compliance with EU rules. The rules on outsourcing policies, procedures and agreements will now also apply to these institutions when they outsource activities within the group to which they belong. The change will also be implemented for premium pension institutions, equally in line with relevant European regulations. However, the proposal fails to clarify why intra-group outsourcing is less risky for other financial institutions, nor why a cross-sector approach is abandoned.
Publications by EBA, EIOPA & ESMA
EBA, EIOPA & ESMA published several consultation papers, guidelines and other information before the summer period. Below is a selection of publications:
- EBA, EIOPA and ESMA recently launched several public consultations. For finance practitioners, the EBA-consultation on contractual provisions accepting bail-in at banks may be especially relevant. Many consultations run until various dates in September and October 2020.
- EBA also published guidelines on how to take into account COVID-19 in the SREP (pillar 2) analysis, advocating pragmatism and flexibility within certain boundaries. Separately, it calls on resolution authorities to take COVID-19 into account in their work, and took stock of practices on the application of the prudential framework. Lastly, EBA published an overview of public guarantee schemes issued in response to the COVID-19 pandemic.
- On the same topic, EIOPA identified options for insurance against pandemic risk, and published a statement on recognition of schemes based on national reinsurance for COVID-19 related credit insurance and a statement on reporting in the context of COVID-19.
- EBA took stock of remuneration practices, and observed an increasing number of high earners, and persistence of different remuneration practices and waivers thereof across the EU.
- ESMA announced that – in the wake of the Wirecard events – it will review the financial reporting system in Germany.
- Jan Pieter Uittenbroek, Senior Associate | j.uittenbroek[at]houthoff.com