News Update Financial Regulatory

6 July 2021

In this News Update, we discuss the AFM publications on advisory software and personalising insurance premiums and conditions. We also look at a DNB report on BigTech, the Investment Firm Regulation that entered into force on 26 June 2021 and the ECB's consultation on its revised Guide to fit and proper assessments. Finally, we highlight some other financial regulatory publications.

AFM – Points of attention when using advisory software

Because advisory software is an important tool in the financial advice process, the Dutch Authority for the Financial Markets ("AFM") carried out research to gain further insight into the software's influence and role in providing financial advice and how it supports the financial adviser. In the report 'Points of attention when using advisory software' ('Aandachtspunten bij het gebruik van adviessoftware', only in Dutch), published on 22 June 2021, the AFM addresses points of attention regarding the quality of advice and information security. To ensure the quality of advice, the AFM considers it important that the advice is personalised, recorded and substantiated, and that agreements are made with the client and that these are recorded. To ensure information security, the AFM draws attention to locally installed advisory software, advisory software in the cloud and the reliability of the advisory software's results.

Although the research concerned advisory software for disability insurance, the points of attention are also relevant to advisory software for other complex products.

AFM – Personalising premiums and conditions in the insurance sector

On 8 June 2021, the AFM published the exploratory study 'Personalisation of premiums and conditions in the insurance sector' ('Personaliseren van prijs en voorwaarden in de verzekeringssector', only in Dutch). In this study, the AFM describes, analyses and identifies the development and application of personalised premiums and policy conditions in the Dutch insurance sector, with a focus on non-life insurance. The AFM identifies the following nine points of attention for individual insurers, the industry and policymakers to prevent the undesirable effects and side-effects of personalising premiums and policy conditions based on behaviour and data.

Considerations for individual insurers:

1. Take into account how attributable and controllable the input data is.
2. Take the customer's interest into account in a balanced way when using data to determine the premium.
3. Do not use the insights gained from data for a specific insurance and also for the premiums of other insurance.
4. Do not make the sharing of behavioural data an obligation.
5. Ensure high quality of data and data analysis so that there can never be any unlawful direct or indirect discrimination.

Considerations for the sector and policy makers:

6. Take into account both the short and the long term.
7. Transparency and explainability can help increase customer awareness.
8. Ensure the insurability of customers.
9. A duty of acceptance is a means to ensure insurability.

See also the blog 'Points of attention for personalising premiums and policy conditions' ('Aandachtspunten voor het personaliseren van premies en polisvoorwaarden', only in Dutch) on VAST (Verzekeringsrecht, Aansprakelijkheid, Schade en Toezicht).

DNB – Rise of BigTechs requires adjustments in financial supervision

On 24 June 2021, the Dutch Central Bank (De Nederlandsche Bank, "DNB") published the report 'Changing landscape, changing supervision' ('Veranderend landschap, veranderend toezicht', only in Dutch). This report confirms that the rising importance of BigTechs such as Google, Amazon, Apple and Facebook in the financial sector requires special attention from supervisory authorities such as DNB. Legislation and regulations need to be adapted in response to new risks and more European-level supervision needs to be developed. There should be a focus on closer cooperation between different supervisors, and financial institutions will have to be seriously challenged on their business models' sustainability.

DNB/ECB – Investment Firm Regulation entered into force

On 26 June 2021, the Investment Firm Regulation ("IFR") entered into force. However, implementing the Investment Firm Directive ("IFD") in Dutch law and regulations has not yet been finalised. The plenary discussion of the bill in the House of Representatives is currently scheduled for week 37 (the week of 13 September 2021). As a result, the IFD requirements, for example, on minimum equity, governance, remuneration policy and ICLAAP/SREP will not enter into force in the Netherlands until later. Until then, the often comparable requirements from the Capital Requirements Directive will continue to apply based on the unamended Financial Supervision Act (Wet op het financieel toezicht). The IFR, as a European regulation, will be directly binding on investment firms as of 26 June 2021.

Linked to this, the European Central Bank ("ECB") announced on 25 June 2021 that it will supervise the largest and most systemic investment firms. They must apply for a banking licence and consequently be supervised by the ECB. The investment firms that will be supervised by the ECB are those that provide key market and investment banking services and are exposed, in a similar way to banks, to credit and market risk. More specifically, the EU legislation defines systemic investment firms as those that trade financial instruments on their own account or place financial instruments on a firm commitment basis and have total consolidated assets above €30 billion. Such investment firms are seen as carrying significant risks on their balance sheet.

ECB – Consultation on revised Guide to fit and proper assessments

On 15 June 2021, the ECB launched a public consultation on the draft of a revised and more comprehensive version of its Guide to fit and proper assessments and an updated fit and proper questionnaire. The new versions will eventually replace the existing guide (published May 2018) and questionnaire (published 2016). The enhancements contained in the documents aim to raise the bar, increase transparency and improve the quality and efficiency of fit and proper assessments and processes. They also introduce supervisory expectations on climate-related and environmental risks and explain the ECB’s approach to diversity. The consultation period runs until 2 August 2021.

Other financial regulatory publications

We have highlighted a selection of other publications by legislatures and regulators for the financial markets and financial supervision since our last News Update was published.

• The AFM published the report 'A review of MiFID II and MiFIR: Recommendations on transparency and a consolidated tape', the exploratory study 'Controlled outsourcing' ('Beheerst uitbesteden', only in Dutch), its revised policy rule for determining the amount of administrative fines (only in Dutch) and the 'Decree on restrictions on turbos' (Besluit beperkingen aan turbo's, only in Dutch), which will enter into force on 1 October 2021.
• The ECB announced to extend the leverage ratio relief for banks until March 2022 and launched a consultation on updates to options and discretions policies.
• The European Banking Authority ("EBA") launched consultations on new Guidelines on cooperation and information exchange in the area of anti-money laundering and countering terrorism financing, on technical standards on crowdfunding service providers, and on its technical standards on the calculation of the €30 billion threshold for investment firms. The EBA also published a report on the application of early intervention measures under the Bank Recovery and Resolution Directive, its 2020 Annual Report, its final revised Guidelines on major incident reporting under PSD2, final draft technical standards on supervisory disclosure under the IFD and an analysis of the current RegTech landscape in the EU.
• The European Insurance and Occupational Pensions Authority published a report on artificial intelligence governance principles and its 2020 Annual Report.
• The European Securities and Markets Authority updated its Opinion on reporting information under the AIFMD, published its Final Report on Guidelines on the MiFIDII/MiFIR obligations on market data and its 2020 Annual Report.
• The Single Resolution Board published its 2020 Annual Report.
• The Basel Committee on Banking Supervision issued a public consultation on preliminary proposals for the prudential treatment of banks' cryptoasset exposures.

If you have any financial regulatory questions, please do not hesitate to contact Berry van Wijk and Roel Theissen. For questions related to investment management, you can also contact our colleague Oscar van Angeren.