AFM SUMMARY ANNUAL REPORT FOR 2012

Transcription

1 AFM SUMMARY ANNUAL REPORT FOR 2012 The annual report gives account of the AFM s actions to achieve its targets in The summary focuses on the results achieved by the AFM in 2012 within its nine supervisory themes. STRATEGIC OBJECTIVES The AFM has three strategic objectives: 1. The AFM promotes the provision of financial services with due care; 2. The AFM supervises the fair and efficient operation of the capital markets; 3. The AFM contributes to the stability of the financial markets. Together with the financial sector, we have the important task of restoring justified confidence in the financial markets. INTEGRATED APPROACH In view of the above strategic objectives, the AFM s strategic focus is mainly on the financial markets and financial institutions. Clearly, our own internal organisation needs to be properly equipped for this role. The AFM strives to promote a fair, well-structured and therefore sustainable financial sector. This ambition is in our organisation s DNA and motivates all our staff. The AFM also naturally focuses attention on its own sustainability profile. This attention however only has a real effect on society if we devote it expressly to achieving our broader strategic objectives. It is our strategic role as a supervisor of institutions and markets that is most important for the realisation of a more sustainable financial sector. The same applies to our attention to financial products, concepts, service provision and the reporting that is provided in this respect. In order to express the strategic focus of our organisation as effectively as possible, the AFM s annual report is structured primarily on the basis of these strategic objectives, with extensive attention devoted to risk and good corporate governance, in addition of course to the financial reporting with which this report is concluded. AFM EXERCISES RISK-DRIVEN SUPERVISION We set priorities so that our presence can be focused where the risks are the greatest. For its riskdriven supervision, the AFM continually analyses market developments and risks in order to set its priorities. This does not mean that the AFM can remove all risks. In its budget for 2012, the AFM selected nine supervisory themes on the basis of a risk analysis of market developments. The budget for 2013 includes the themes the AFM has chosen on the basis of its risk analysis for MARKET DEVELOPMENTS LEADING TO ADJUSTMENT OF THE AFM S SUPERVISION Significant developments are occurring in more or less all the areas in which the AFM operates. Firstly, we list the major structural reforms in the financial sector that we have worked on in recent years. Major structural reforms: 1. Coordinated supervision of systemic risks; 2. Changes to the Dutch financial sector as a result of social pressure; 3. Reforms of the mortgage business; 4. The European banking union; Page 1 of 9

2 5. The shift from funding by banks to funding by the market; 6. Increased European harmonisation in retailing. Current market developments The developments listed below give a brief summary of the most important market effects, and are dealt with in the themes in the annual report in more detail: 1. Supervision of the product development process; 2. Ban on inducements; 3. Pensions; 4. Financial debacles in the public and/or professional sector; 5. Policy development in the wake of the Libor manipulation scandal; 6. Major developments in European capital markets regulation; 7. The growth of electronic trade; 8. More cohesion between financial reporting, accountancy and governance. RISK STATEMENT The risk statement lists the principal market risks identified by the AFM but which we cannot adequately prevent or control. These are risks that are to a degree inevitable or related to limitations in statutory powers. These are: 1. The intricate system of new European legislation and regulation may turn out to be ineffective; 2. The effectiveness of investments in expertise and resources depends on foreign supervisors; 3. The AFM depends on the effectiveness of European supervision; 4. The introduction of a tax on transactions could have undesirable effects on the market. THE AFM IN FIGURES Net expenses in 2012 amounted to EUR 79.8 million and were thus 1% over the budget for 2012 (EUR 78.7 million). Income in 2012 came to EUR 80.8 million. Of this income, 67% (EUR 54.0 million) came from contributions by market parties and 32% (EUR 25.6 million) from government contributions. In addition to the above-mentioned primary sources of funding, 2% (EUR 1.2 million) originated from other income that mostly relates to the lease of a part of our office building. The exceeding of the 2012 budget by EUR 1.1 million was chiefly due to an unbudgeted contribution to the pension provision to restore the funding ratio, and the costs of a number of new activities that were not included in the budget, of which the testing of the supervisory directors of the large banks and insurers was the most important. These additional costs were largely offset, mainly by lower salary costs and a partial release from the provision formed for potential defaults on receivables. Personnel The number of employees rose in 2012 from 495 to 534 FTE. The average number of employees in 2012 was 526 FTE, and including temporary staff, 549 FTE. This is slightly higher than the average complement budgeted for 2012 of 543 FTE (including temporary staff). Supervisory measures The AFM s supervision is designed first and foremost to achieve the effect desired. This means that the supervisory measures are always subordinate to the effect they are intended to achieve. They are simply a means to an end. The AFM moreover takes account of the nature of problems in specific financial sub-sectors, so that its approach may vary according to the sector concerned. This strategy Page 2 of 9

3 means that some supervisory measures may fluctuate each year, depending on their expected effectiveness at particular times. This applied to a lesser extent in 2012 than in the year before. In addition, the AFM devoted more attention in 2012 to the front end of its supervisory process as a result of new legislation and regulation. We are aware that new regulation is often initially associated with an additional need for information and consultation in order to achieve the effect that market parties can smoothly adjust to the new requirements. Formal measures There was a further decline in the number of formal measures imposed in 2012, from 261 to 187. The number of administrative fines imposed declined to 22 in 2012 from 36 in We made much effort in 2012 towards achieving the objectives of broadly influencing the market and preventing offences. The AFM did however impose more incremental orders for penalty payments in 2012 (28) than in 2011 (19). These orders are mostly imposed if the AFM has doubts regarding the legality of certain activities. The number of instructions issued declined, from 64 in 2011 to 16 in Since 2012, the division responsible for the supervision of financial reporting has more frequently preferred to issue a letter of reminder rather than a formal instruction. This approach is just as effective, involves significantly less administrative work and increases the efficiency of the supervisory process. There was a slight fall in the number of licences revoked (102 in 2011 versus 93 in 2012). This mainly concerns the lower end of the market, which features companies that cannot meet the statutory requirements. The number of public warnings declined slightly, from seven in 2011 to five in In 2012, an institution was required to make an undertaking for the first time. An undertaking is a declaration by an offender in which the party concerned acknowledges that an offence has been committed, declares that it will cease to commit the offence and agrees to publication of this declaration by the supervisor. Informal measures The number of informal supervisory measures fell from 919 to 543. These concern instructive conversations regarding standards and letters, including warning letters. The use of informal measures depends on the effect to be achieved and the nature of the problem at a particular time. A conversation or a letter can have the desired effect of bringing conduct into line with standards; the use of statutory enforcement measures is then no longer needed. Legal proceedings The decline in the number of objections to levies continued in 2012 to around half the number seen in other objections were submitted in 2012, which is similar to the number seen in 2011 (100). Most of the objections concerned the revocation of a licence (35), or the imposition of an incremental order for penalty payments or a related ruling (28). There were 12 objections to the imposition of an administrative penalty and 8 against the decision in relation to a licence application. THE AFM THEMES In its budget for 2012, the AFM selected nine supervisory themes on the basis of a risk analysis. 1. Product providers will put the customer s interest first; 2. The quality of financial services will improve; 3. Capital accumulation products and the associated advice will improve; 4. The size and risks of pensions will be made more transparent; 5. Executive and supervisory directors of financial enterprises will take responsibility; 6. The quality of information in the capital markets will improve; Page 3 of 9

4 7. Trading and infrastructure will continue to be ethical and robust; 8. Severe breaches of integrity will be effectively and quickly dealt with; 9. The quality of international supervision will be promoted. A brief account of the results of each theme is presented below. 1. Product providers will put the customer s interest first Customers are entitled to be offered products and services of good quality that meet their needs. This theme is designed to bring about a change of culture, behaviour and working methods at the ten largest banks and insurers. The banks and insurers made significant progress towards putting their customers interests first in The AFM uses a dashboard to measure the performance of the banks and insurers in this respect. The average score in 2012 was 3.3 on a five-point scale, compared to a 3 in The AFM Consumer Monitor shows that these efforts have been noticed by consumers. More frequently, their experience is that the information provided helps them to make good choices. More of them have the impression that institutions are doing their best to avoid disappointments, and they also increasingly feel that companies are acting in their interests. The employees at the banks and insurers are increasingly assessed with regard to this theme on the basis of appropriate performance and competence agreements. Attention is also being paid to the skills that are needed here. Furthermore, the organisation needs to have a long-term focus and a self-critical attitude in order to change thinking in the organisation regarding the principle of putting the customer s interests first. For the purpose of internal control, it is essential that the supervisory board is involved in this area. Many financial enterprises still have some way to go in these areas. Supervision of the quality of products and the product development process is being exercised from 2013 onwards. The supervisory strategy and the practical and operational design for this were formulated in The quality of financial services will improve Advisers and intermediaries are responsible for advising a large proportion of Dutch consumers with regard to financial products. The ban on inducements came into force in This entails a radical change to the culture and structure of the market. During the past year, the AFM worked extensively on this subject in order to provide as much clarity as possible to financial service providers with regard to the new regulation. As a result of the prohibition, consumers will soon be able to see exactly what they are paying for and to whom their money goes. Financial service providers accept the importance of supervision, but have criticism regarding the role and the actions of the AFM. We have had extensive contacts with these parties and with industry organisations. The AFM opened its Business Desk in 2009; this Desk plays an important part in this process, as market parties can via telephone or put any questions they may have relating to supervision to this Desk. This facility was used extensively in We also receive useful information for our supervision from the market through this channel. Many companies are making good progress, however we are also seeing behaviour that is not acceptable. This may include, for instance, the use of hidden charges for consumer credit, the practice by companies of broking harmful investment products from a foreign provider, or employers who encourage their advisers by means of extra financial incentives to sell customers as many Page 4 of 9

5 products as possible. In this area we are increasingly using an integrated cause-driven approach to problems which is proving to be extremely effective. Page 5 of 9

6 3. Capital accumulation products and the associated advice will improve The AFM wants to prevent avoidable disappointments for consumers wishing to accumulate capital by investing. It is important that consumers are offered investment solutions that are cost-effective and comprehensible, that meet a real need, and that deliver what is promised. In order to be able to assess the quality of an investment service, customers need to know what they can legitimately expect. The AFM has presented a starting point for discussion of this area in its guideline Focus on the Client. The AFM has provided points of reference to investment funds in 2012 to enable meaningful comparison, or benchmarking, with respect to their performance. Both banks and portfolio managers are engaged in the transition towards an earnings model with direct fees and without third-party payments. The consumer will thus pay directly for the service he purchases. The custody banks are also phasing out return commissions and have indicated their willingness to work with the remuneration models approved of by the AFM. The AFM has expressed its view to the market that better information on the total costs should be provided by stating the total cost of ownership (TCO). Several parties have adjusted the pricing structure of their service concepts, and have improved the information they provide on charges. One important conclusion of the AFM s review is that synthetic index trackers are so complex that they cannot be understood by consumers, or in any case only with difficulty. These are products that in the AFM s view should not be offered to consumers, or if they are, only with the intermediation of a professional. Several distributors have indicated that they will cease to offer synthetic index trackers. 4. The size and risks of pensions will be made more transparent Transparency with regard to pensions is an issue that still requires attention. An AFM analysis shows that many of the risks that people incur are not stated in the Uniform Pension Statement (Uniform Pensioenoverzicht, or UPO) or on The insurers accordingly will include a market-based interest rate in their UPOs in 2013, and will further extend the information provided. Together with DNB, the AFM has assessed the crisis plans of the pension funds. More or less all pension funds now have prepared an adequate financial crisis plan with the related communication. A similar process for transitional arrangements to other pension contracts is also ongoing. The eight pension funds that had to impose curtailments in 2012 have properly informed their target groups. The Pension Federation has published a list of 80 of the 103 pension funds that may be forced to impose curtailments in funds were investigated that had not been published by the Pension Federation. The eight funds that had not provided clear information regarding the curtailment have been called to account. In 2011 the AFM published its investigation report 'The costs of pension funds deserve more attention'. The Pension Federation has included our standpoint in recommendations for its members. A first interim report shows that 85% of pension funds provide transparent information on the costs of pension management, 91% do so with regard to investment management fees, and 76% do so with regard to transaction costs. One pension fund and two insurers had an administrative penalty imposed for failing to provide adequate information in exit letters or failing to issue a letter of termination. Page 6 of 9

7 5. Executive and supervisory directors of financial enterprises will take responsibility Individual executive directors and the executive board as a whole greatly influence the behaviour of financial institutions and thereby the sustainability of the financial sector. In 2012 the AFM devoted relatively extensive capacity to the testing of supervisory directors. The government s intention, with the introduction of the suitability standard for directors of financial enterprises, is to ensure that adequate quality standards are maintained for supervisory as well as executive directors. Together with DNB, and at the request of the House of Representatives, the AFM has now tested the suitability of the supervisory directors of the four largest banks and the four largest insurers. 6. The quality of information in the capital markets will improve The intention of this theme is that the completeness, accuracy, timeliness and comprehensibility of financial information are increased, thus increasing the level of transparency in the capital markets. The AFM has conducted investigations at the four largest audit firms and at other audit firms holding a licence to audit public interest entities (PIEs). A report on the generic findings was published in early A relatively significant incident concerning the audit of housing corporations occurred in The AFM published its imposition of three administrative penalties, and the Disciplinary Court for Auditors in Zwolle dealt with three disciplinary complaints from the AFM in The Senate gave its approval to new regulations for the independence of an audit firm when it audits a PIE. Moreover, the Chinese walls between the various divisions of the AFM s supervision have been removed. The percentage of financial statements including material misstatements discovered by the AFM fell from 50% in 2011 to 40% in The number of material misstatements per set of financial statements also declined, from an average of 2.9 in 2011 to 1.9 in These developments show that the quality of financial reporting in the Netherlands has improved. The same applies to the semiannual financial reporting that was reviewed. The AFM conducted four thematic reviews. These specifically focused on impairments of assets, the measurement of immovable property and the way in which non-controlling interests affect a company s financial situation. Special attention was devoted to the treatment of government bonds in the balance sheets of financial enterprises. In their financial reporting for 2011, listed companies provided more information on their exposure to the risks associated with government bonds than they did a year earlier. New prospectus regulations came into force on 1 July 2012 as a result of the revised European Prospectus Directive. As a result of the uncertainty in the capital markets arising from the euro crisis, the development of the number of applications for approval of prospectus documentation and the composition thereof this year is not certain. 7. Trading and infrastructure will continue to be ethical and robust Administrative penalties were imposed in 2012 for the dissemination of insider information, the manipulation of information and manipulation of the market during the opening auction for new issues. The AFM took trading measures on two occasions. The AFM also published the findings of its investigations of best execution and post-trade transparency in In early 2012, the AFM devoted much attention to the potential merger between Euronext and Deutsche Börse, which ultimately fell through. Page 7 of 9

8 The AFM has encouraged investment firms to devote continuous attention to suspicions of market abuse, and has conducted studies with the purpose of making permanent improvements in this area. The number of notifications increased sharply in 2012, but is still low in comparison with our fellow supervisors in Europe. New rules applied in Europe regarding the notification of short positions in listed companies with effect from 1 November, and the number of notifications received by the AFM has accordingly increased. New rules also applied with regard to automated securities trading with effect from 1 May The AFM has extensively drawn the attention of investment firms to these obligations and has noted how they apply them. There were breakdowns at NYSE Euronext on a number of occasions in Together with its fellow supervisors within the College, the AFM monitors that procedures are followed, including the lessons learned with regard to the cause. The US securities markets supervisor FINRA and the AFM signed a Memorandum of Understanding (or MoU) in October to share information with the intention of strengthening their mutual cooperation and improving their efforts to prevent potential market abuse. The AFM was actively involved in the formulation of the revised European Market in Financial Instruments Directive (MiFID) and the Market Abuse Directive (MAD). 8. Severe breaches of integrity will be effectively and quickly dealt with The AFM continues to closely monitor providers offering unlisted immovable property investments to retail customers. This sector still features numerous shortcomings. The number of signals indicating providers of investments acting in bad faith or acting illegally is rising. This is partly due to the raising of the exemption limit from EUR 50,000 to EUR 100,000. The AFM has devoted particular attention this year to parties that require a licence for this activity. The AFM has maintained a warning list for boiler rooms since We are seeing a decline in the number of signals received. An investigation was carried out into the role of financial services providers in the conclusion of interest-rate derivatives contracts by the housing corporation Vestia and the possibility that they required a licence for this. We also looked into the investment services provided to Vestia by banks. Whereas there was one investigation of a foreign-exchange product provider in 2011, there were nine such investigations in The reason for this was a sharp increase in the number of offerings of this kind of investment. The life settlements project was started in 2010 with respect to the offering of life assurance products in the Dutch market and the regular occurrence of infringements in this area. It would now appear, in 2012, that this market has largely disappeared. The AFM has investigated various consumer credit intermediaries and established that they have been selling to people at home even though this is prohibited by law. On instruction of the AFM, they have ceased their activities, and some intermediaries have subsequently surrendered their licences. The AFM has investigated 17 providers of pay-day loans. The result of these actions is that the market for pay-day loan providers has been cleaned up. There have also been investigations conducted at licensees which had committed serious breaches of integrity. In most cases, it emerged that the properness of the policymaker(s) was not beyond question, and/or that safeguards in relation to the ethical operation of the business were not in place. This led to three cases in which the licence was revoked, and to voluntary surrender of the licence in a further twenty cases. Page 8 of 9

9 9. The quality of international supervision will be advanced The quality of the international supervisors and the regulations are important for the Netherlands. Many new European regulations are under preparation, and existing regulations are being amended, partly as a result of the credit crisis. In 2012 the AFM strove to achieve closer and more efficient cooperation between the financial regulators in other European Member States and countries outside the EU, at both regulatory and executive level. This especially concerns cooperation in day-to-day supervision, crisis situations, and issues in which there is a common interest. In addition to the regulatory processes, we pay special attention to market developments that could significantly affect the Netherlands. The AFM s international activities in the past year mainly concerned the improvement of international regulation, the representation on international forums, the strengthening of cooperation between financial regulators, and the contribution to institutional changes in international supervision. Page 9 of 9