Investor Protection Improvement Points for Smaller Asset Managers

SUPERVISION UPDATE MARCH 2026 Complying with investor protection standards: what does this mean for you?

In short: The AFM conducted risk-based research in 2024 and 2025 on a number of smaller asset managers. We examined compliance with various investor protection standards. Based on these investigations, we have drawn up several improvement points that we expect will also be valuable for other asset managers. We expect market participants to act on these.

About our research It is important that consumers invest in financial instruments that suit their personal circumstances and preferences. This increases trust in the financial sector and also customer trust in the company they invest with. There is legislation and regulation that should contribute to consumers investing in instruments that suit them. Smaller asset managers must also comply with this. We have investigated compliance with a number of standards; for each standard, we share some key improvement points for smaller asset managers.

1. Suitability and recording: ask thoroughly, record carefully
2. PARP: develop and test products carefully
3. Professional competence: ensure employees are demonstrably professionally competent
4. Cost transparency: be transparent about all costs
5. Conflicts of interest: prevent conflicts of interest
6. Notifications: report incidents and changes directly to the AFM
7. Compliance: properly establish the compliance function

Areas for Improvement for Smaller Investment Firms 2 SUPERVISION UPDATE

1. Suitability and recording: ask thoroughly, record carefully The suitability test is intended to ensure investments align with the client. This requires careful questioning regarding, among other things, the client's financial situation, investment goals, and preferences. The collected information must then be taken into account when (ultimately) structuring the investment portfolio. Careful questioning is important because it forms the basis for determining the suitability of the investment and preventing a mismatch. Careful recording is also important. It must be demonstrably recorded what information was collected and how this information was used in investment decisions. Careful recording makes it clear that the firm is acting in accordance with regulations. This not only contributes to client protection. It also reduces the legal risk for the company during supervisory investigations and potential claims. Suitability test – what the AFM expects from you • Asset managers collect information on behalf of the client regarding their financial position, objectives, risk tolerance, and knowledge and experience. They subsequently base the management of the individual portfolio partly on the collected information. • Asset managers provide clear explanations regarding the sustainability aspect of the suitability test. They provide clients with suitable products that match their sustainability preferences as much as possible. In doing so, asset managers do not steer clients towards adjusting these preferences. Recording – what the AFM expects from you • Asset managers collect information in a manner that ensures it is actually obtained. • They then properly record the information collected from the client. When no record is available showing that the required information was obtained, an asset manager cannot demonstrate that they actually obtained the information. • Asset managers record agreements with clients, so that the management of the individual portfolio can be traced afterwards.
2. PARP: develop and test products carefully The 'Product Approval and Review Process' (PARP) ensures that financial instruments align with the interests and needs of the intended target group and do not cause unintended harm. This requires (good policy for) clear target group delineation, scenario analyses, and periodic evaluation. Asset managers must establish PARP policy because they distribute financial instruments. Separately, companies that (also) develop financial instruments must also establish PARP policy as developers. Furthermore, the policy must be up-to-date, adapted to the complexity of the instrument, and lead to timely adjustment or withdrawal if the instrument proves unsuitable. This prevents complex or risky instruments from ending up with clients for whom they are not appropriate. PARP – what the AFM expects from you • Asset managers – including smaller ones – have adequate procedures and measures in place and document them. • Asset managers ensure that the target group for which the financial instrument is intended is sufficiently (deeply) delineated using the five target group categories1, as explained in the ESMA guidelines on MiFID II product governance requirements. • Asset managers elaborate further on the target group for more complex and risky instruments. They also establish policy to ensure that clients are not invested in financial instruments that do not match their baseline assumptions and risk profile, for example because they are too complex for them. • Asset managers analyze and evaluate the functioning of an instrument based on multiple scenarios. Thus, asset managers investigate how an instrument performs under both positive and negative market conditions. Think here of interest rates or developments in global financial markets. But also, for example, the personal situation of the client. Asset managers determine that an instrument does not detract from the needs of their target group. • Asset managers periodically evaluate, or when there is cause to do so, their procedures and measures and structure this process so that the evaluation of the financial instrument takes place in a timely manner. They align the evaluation frequency with the complexity of the instrument and adjust the instrument quickly if necessary. In the extreme case, developers withdraw an instrument from the market when it becomes apparent that it detracts from the interests of the client or the target group for which the instrument was developed. • Asset managers are careful when selecting financial instruments for managing individual portfolios. Thus, they prevent instruments that are not suitable for retail investors from ending up in the portfolios of retail investors.

Areas for Improvement for Smaller Investment Firms 3 SUPERVISION UPDATE 3. Professional competence: ensure employees are demonstrably professionally competent Having professionally competent employees is a crucial prerequisite for good investment services and careful treatment of clients. Employees of investment firms who inform or advise clients on investments must therefore be demonstrably professionally competent. This also applies to employees of smaller asset managers. This can be done via DSI registration or an equivalent alternative. With an equivalent alternative, investment firms must themselves record which training courses employees have followed and how they keep their knowledge up-to-date. Current and relevant knowledge is essential to properly inform and advise clients and protect their interests. Professional competence – what the AFM expects from you • Investment firms ensure that every employee who informs or advises clients on investments or manages their assets is demonstrably professionally competent according to the legal requirements that apply. Investment firms have registered all employees who must be professionally competent with DSI, or keep their own records of which relevant training courses they have followed and how they have kept their knowledge up-to-date.

Areas for Improvement for Smaller Investment Firms 4 SUPERVISION UPDATE 4. Cost transparency: be transparent about all costs Cost transparency is crucial. Clients must be able to see all costs in advance and afterwards, tailored to their personal situation. In case of changes, you must inform them promptly and clearly so they can make well-considered choices. Cost transparency – what the AFM expects from you • Asset managers provide information on costs and charges both in advance (ex-ante) and afterwards (ex-post), specifically tailored to the client's personal situation. • Asset managers combine the information they provide on the costs and charges of the services (investment and ancillary services). Additionally, they combine the costs and charges of the financial instrument separately. They then add up the total costs and charges and present them both as a monetary amount and as a percentage. • Asset managers inform clients promptly of significant changes in investment services, for example regarding the level of costs and charges. They also clearly specify what the changes concern.

Areas for Improvement for Smaller Investment Firms 4 SUPERVISION UPDATE 5. Conflicts of interest: prevent conflicts of interest Good policy for preventing conflicts of interest is essential. Especially when you offer your own financial instruments, you must recognize and mitigate incentives such as volume and margin advantages. If conflicts of interest cannot be completely prevented, you must inform clients clearly. Policy to prevent conflicts of interest – what the AFM expects from you • Asset managers identify conflicts of interest in a timely manner and prevent or control them with appropriate policy. • Asset managers inform clients via a durable medium2 about conflicts of interest that cannot be fully mitigated. They provide sufficient explanation tailored to the client's characteristics, so that the client clearly understands what is happening and can make a well-considered decision regarding the investment service, investment activity, or ancillary service where the conflict arises. • Asset managers that include their own (co-)developed funds in client portfolios alongside funds from other providers identify the volume incentive – it is indeed tempting in such cases to let as many clients as possible invest in these own funds – and mitigate this conflict of interest by explicitly including this incentive in their policy. • Asset managers, for example, apply a fixed (average) profit margin for their own funds, so that the margin incentive within the group can also be mitigated as much as possible. 2 Article 4(1)(62) of MiFID II: Any tool that enables a client to store personally addressed information in a way that allows it to be consulted for a period adequate for the purpose, and that allows that information to be reproduced later unchanged.

Areas for Improvement for Smaller Investment Firms 5 SUPERVISION UPDATE 6. Notifications: report incidents and changes directly Sound business operations require timely reporting of incidents and material changes to the AFM. Ensure clear procedures and policy so you know when reporting is required. Think of integrity or information security incidents. Mandatory notifications – what the AFM expects from you • Asset managers report without delay to the AFM (Toezicht_am@afm.nl) when, for example, changes occur in the corporate structure, services, or other relevant aspects of their organization. They also report incidents to the AFM – events that pose a serious threat to sound and controlled business operations. • Asset managers have procedures and measures for handling incidents and the administrative recording thereof. • Asset managers include in their policy for handling and recording incidents, and in their Administrative and Internal Control Framework (AO/IC), a description of when a material change and incident occur, and which events and/or behaviors qualify as an incident and material change. Examples of reportable incidents include integrity incidents and information security incidents. In the description, they take into account the nature, scale, and complexity of their business, as well as the services and activities.

Areas for Improvement for Smaller Investment Firms 5 SUPERVISION UPDATE 7. Compliance: properly establish the compliance function A strong compliance function helps your organization operate within the rules. This requires structural monitoring, clear responsibilities, and sufficient expertise. Even when outsourcing, your organization remains responsible for the quality of compliance. Compliance – what the AFM expects from you • Asset managers establish a robust compliance function. • Asset managers ensure that the compliance function performs its tasks and responsibilities on a permanent basis. • Asset managers document in writing how the responsibilities of the compliance function are continuously and properly executed. • Asset managers ensure that the compliance function draws up a risk-based monitoring program; a program that takes into account all areas of the investment firm's investment services, investment activities, and relevant ancillary services, including relevant information on the monitoring of complaint handling. Priorities are set in this monitoring program based on the assessment of compliance risk, so that this risk is monitored extensively. • Asset managers ensure that the compliance function has the necessary authority, resources, and expertise, and ensure that its independence is guaranteed. • Asset managers may outsource the compliance function to third parties. However, the AFM wishes to emphasize that the asset manager always remains responsible for complying with the relevant legislation and regulations. The outsourcing must also meet the requirements that apply to outsourcing work to third parties.3 3 AFM makes recommendations for monitoring outsourcing in the asset management sector

Actively address improvement points The AFM expects asset managers to familiarize themselves with the expectations as described in this document and to implement improvements within their own company where necessary. The AFM continuously focuses on investor protection standards. Questions? If you have any questions following this publication, please contact the Business Desk via ondernemersloket@afm.nl.