AFM Agenda 2024

AFM AGENDA 2024 AFM Agenda 2024

In brief: The far-reaching digitalization, internationalization, sustainability transition, and the shift to the new pension system are impactful trends affecting both the financial sector and the AFM. These trends guide our work with the aim of limiting potential risks. This Agenda 2024 outlines the activities we carry out this year regarding our supervision of financial services, capital markets, asset management, and accounting & reporting.

Digitalization Internationalization Pension Transition Sustainability

The AFM responds flexibly to these impactful trends and developments in 2024: The AFM Agenda 2024 describes the AFM's objectives and activities for the coming year. AFM Agenda 2024

AFM AGENDA 2024

1. Key Developments 3
2. Strategy 6
3. Priorities and Key Activities 2024 7 3.1 Supervision of Financial Services 9 3.2 Supervision of Capital Markets 14 3.3 Supervision of Asset Management 17 3.4 Supervision of Accounting and Reporting 21 3.5 AFM-wide Topics 25
4. Finances 2024 29
5. Annex: External KPIs 38 Contents

AFM Agenda 2024 | Key Developments 3 AFM AGENDA 2024

1. Key Developments You can read about the key developments and risks in more detail in our publication Trendzicht.

General Developments Economic growth is slowing, with persistent inflation and rising interest rates as major causes. In 2022, inflation rose sharply due to significant price increases in energy. Central banks worldwide intervened with tight monetary policy to curb inflation, but core inflation has not yet been contained. It is expected that in 2023 and 2024, inflation will remain well above the ECB's 2% inflation target. Meanwhile, the Netherlands is experiencing a mild recession, as growth figures for the first and second quarters of 2023 were just below zero. The Dutch economy is expected to grow by 0.7% over all of 2023 and by 1.4% in 2024, while the labor market remains tight. However, this modest economic growth is vulnerable to further inflation and interest rate shocks, as well as a potential slowdown in China. Government intervention has so far limited the financial consequences of inflation and interest rate increases for Dutch households, but vigilance is required. The economy's vulnerability is reflected in the financial position of households.

Households feel the impact of high inflation in their wallets, for example through more expensive groceries and higher energy costs. The government is taking measures to mitigate the consequences, particularly for low-income households. This is preventing the expected rise in the number of people living in poverty for the time being. However, concern for the vulnerable remains high, which is why it requires the attention of supervisors and policymakers.

The picture on credit markets is currently stable. Mortgage rates are largely fixed for longer periods, and house prices are adjusting to the new interest rate levels without major shocks. Indications of rising payment problems for consumer or mortgage credit are currently non-existent or minimal. Only a severe economic downturn would worsen this picture, but that is not currently anticipated.

Within the financial sector, high inflation and rising interest rates have a significant impact on business models and the financial valuation of assets. The increase in central bank policy rates causes interest rates on government and corporate bonds to rise. The return of interest rates to more 'normal' levels generally means a healthier business model for most financial companies. It also leads to a more robust financial system because it contains fewer incentives to seek returns through risky activities. However, the transition to normal interest rate levels also causes a decrease in the value of outstanding debt. This particularly affects holders of fixed-income securities. The expected value of companies driven by the promise of their growth potential (such as tech sector startups) is decreasing, while financing at very low interest rates is no longer possible.

With persistent inflation, rising interest rates, uncertainty on capital markets, and the high speed of news dissemination, it is not unlikely that this will lead to abrupt share price fluctuations and liquidity problems in the coming period.

Digitalization Developments in artificial intelligence (AI) are proceeding at breakneck speed and create opportunities and risks for the financial sector. The application of AI (for example, Large Language Models, such as ChatGPT) will have an increasingly large impact on society and the economy, and thus also on the financial sector. In general, AI can contribute to making the financial sector more efficient by taking over various administrative, data processing, and risk management tasks. Additionally, AI can be used for direct service provision in the form of advisory services, designing and executing trading strategies, personalizing offers for loans and insurance, executing targeted marketing campaigns, etc. The use can also bring risks, for example when it is unclear how an AI model reaches a certain outcome. Furthermore, personalization using AI can lead to certain consumers being discriminated against or excluded from the market based on the algorithm used. It is important that financial institutions take sufficient control measures to reduce the risks of digitalization in the credit acceptance process when using algorithms. Additionally, financial institutions must be able to explain the outcomes of their AI models. The European AI Act, currently under development, will provide more leverage points to channel the potentially large impact of AI in the right direction, but it will likely lag behind the advancing technological possibilities.

The digitalization of the financial sector and the offering of products and services via online platforms are proceeding at a steady pace. This primarily involves the intertwining of the financial sector with (large) tech companies. The entanglement of large tech companies often leads to lower costs and greater efficiency, but also creates greater dependency and concentration risks, vulnerabilities such as digital crime, and reduced leverage points for supervision. The crypto market also remains in motion. With the Markets in Crypto Assets Regulation (MiCAR), a good first step is taken to bring this market under supervision. The AFM gains more possibilities to tackle malicious practices. However, regulation does not solve everything; cryptocurrencies remain highly volatile and thus a risky investment. The development of the underlying technology (Distributed Ledger Technology, DLT) is still trying to fulfill the promise in the form of a shift from the traditionally centralized financial system to a peer-to-peer financial system (Decentralised Finance, DeFi). For now, DeFi also carries multiple traditional financial risks, which are further exacerbated by the international decentralized nature and the increased complexity of the underlying technology.

Sustainability Achieving the climate goals of the Paris Agreement is under pressure. This leads to an increase in the risks of climate change, including extreme weather, sea-level rise, and biodiversity loss. In the Netherlands, this means, among other things, increasing financial damage due to drought, flooding, and extreme weather. Much of this type of damage is uninsurable, which can lead to significant financial risks for households and businesses. Societal awareness of this still needs to gain momentum.

The societal and political desire is growing for financial markets to accelerate the sustainability transition. The sustainability of the own home sector is high on the political agenda. To stimulate and better finance the sustainability of one's own home, mortgage lending norms are changing in 2024. This allows for more borrowing with a better energy label. The effectiveness of these measures also depends on good advice from mortgage advisors and providers of mortgage credit.

The demand for green (investment) products is increasing. This leads to strong market incentives to meet this demand. A wave of new sustainability regulation is unfolding. This regulation primarily focuses on improving transparency regarding sustainability risks and impact, and aligning financial products with customers' sustainability wishes. Trust in the 'green' label is crucial for the transition. This also applies to the risks of net-zero claims by issuing institutions and new trends such as voluntary carbon markets. Early intervention and course correction by policymakers and supervisors prevent much uncertainty.

For now, the sustainability transition is lagging behind the desired pace. There is great pressure on sustainability across various areas within the financial sector, but there are also concerns about the speed at which the sustainability transition is proceeding. Asset managers are cautious about classifying their funds because there is still insufficient clear regulation regarding sustainability classifications. Issuing institutions and accountants, among others, are dealing with new European reporting regulation (CSRD), but available sustainability data often falls short of reporting requirements. Another issue is finding the optimal balance between financial return and the ESG impact of investments. The way sustainable investments are presented does not sufficiently align with consumers' motivations to invest sustainably. As a result, consumers find it difficult to determine which sustainable investment aligns with their preferences. When priority is actually given to ESG goals, this requires transparency in informing investors. Although expectations may be high, the real impact on sustainability is often difficult to measure. Furthermore, the continuous growth of passive investing, under pressure from economies of scale and cost savings, does not contribute to strong engagement with polluting companies. All in all, every delay reduces the chance of a timely and orderly transition to a sustainable economy.

Internationalization Financial services are increasingly taking on an international character, which brings cross-border problems and risks. Dutch financial markets are attractive to foreign parties. Driven by digitalization, we see an increase in cross-border financial services. In addition to the positive effects of an increase in supply and a greater diversity of providers, the cross-border nature of financial markets leads to cross-border risks, such as malicious foreign providers of risky investment products, an increase in cross-border market abuse on capital markets, and the creation of an uneven playing field between domestic and foreign providers of financial products and services. These risks may be addressed less adequately at the national level and require an international approach.

In response to the increase in cross-border financial services, we see a movement towards further internationalization of supervision and supervisory convergence. A lot of new, extensive European legislation is coming to the financial sector in the short term. Supervision is also increasingly seeking cooperation, for example between the European regulator for the internal market for electricity and gas (ACER) and ESMA, following the volatile gas market last year. Geopolitical tensions play an important role globally, and European strategic autonomy is in the political spotlight. For a healthy financial system, both a robust banking system and resilient and diversified capital markets are important. This has renewed interest in the European Capital Markets Union (CMU): the ambitious plan to allow money from investors to move freely across European capital markets. Supervisory convergence is of great importance for this.

AFM Agenda 2024 | Strategy 6 AFM AGENDA 2024 2. Strategy The AFM renewed its strategy in 2022. The AFM Strategy 2023-2026 is the basis for the Agenda 2024. The strategy is summarized in the figure below. The AFM advocates for fair and transparent financial markets. As an independent conduct supervisor, we contribute to sustainable financial well-being in the Netherlands. We work risk-driven, data-driven, and results-oriented. Professional organization: an agile and learning organization, an attractive employer, with well-functioning IT. Financial Services Customer interest central in times of transition. Capital Markets Integrity in trading behavior and robust, transparent markets. Asset Management A robust and agile asset management sector. Accounting and Reporting Reliable and relevant (non-)financial information provision. Digitalization, internationalization, and sustainability guide our work. AFM Strategic House

The mission of the AFM guides the execution of our statutory tasks. The mission of the AFM is: 'The AFM advocates for fair and transparent financial markets. As an independent conduct supervisor, we contribute to sustainable financial well-being in the Netherlands'. The AFM employs a supervisory approach that is risk-driven, data-driven, and results-oriented. Risk-driven means that the AFM focuses on matters where the most damage can occur for consumers, investors, and other market parties. Data-driven supervision means that we formulate risk hypotheses and risk indicators, determine information needs, and collect and release data. This allows us to systematically monitor, understand, and effectively address risks. Results-oriented means that we focus on maximum impact using the formal and informal instruments we have. For the best result, we respond to the drivers and causes of behavior. Digitalization, internationalization, and sustainability are the three long-term trends that have a high impact on Dutch society, the financial sector, and the AFM. These trends guide our supervision. The most recent analysis of these can be found in the summary in the previous chapter 1 and the extensive version in our publication Trendzicht. The mission and external developments have been translated into multi-year supervisory objectives for the four supervisory areas. These have been elaborated in chapter 3 for the coming year. Additionally, AFM-wide topics, such as combating criminal behavior and financial stability, have been elaborated in chapter 3.5. A professional organization provides a solid foundation for achieving supervisory objectives and the mission. The objectives in this regard can be found in chapter 3.5.3.

AFM Agenda 2024 | Priorities and Key Activities 2024 7 AFM AGENDA 2024 3. Priorities and Key Activities 2024 In 2024, the AFM prioritizes the following objectives: The AFM controls the effects of digitalization in the market by increasingly supervising technology with data and technology. • Supervision of DORA is being prepared, and institutional supervision of (digital) business operations is strengthened. • Data-driven supervision leads to better supervisory results. • Preparation for the AI Act is completed. The AFM is internationally influential by actively contributing to EU regulation and actively improving EU supervision. • The AFM prepares crypto supervision and builds support within the EU for effectively combating illegal activities and resolving cross-border issues. • We demonstrate within the EU that risk-driven and data-driven work yields results in supervision in an efficient manner. The AFM has an integrated sustainability strategy. • We develop an integrated supervisory strategy for sustainability supervision. • Connectivity between financial and non-financial data (ESG) becomes the norm. • CSRD sustainability implementation is prepared for 2025. The AFM effectively executes priorities in supervision by starting supervision of the pension transition and combating manipulative trading behavior. • AFM supervision of the pension transition successfully starts. • The renewed supervision of financial service providers is successfully implemented. • The AFM combats manipulative trading behavior regarding shares, bonds, and commodities. The AFM is a professional and vital organization that is agile, has a strong learning capacity, and possesses an effective IT infrastructure and sufficient budget. • The IT strategy is successfully implemented through predictable IT implementations, such as the completion of cloud migrations, supporting new tasks, and the renewal of MijnAFM. • The AFM contributes to establishing an appropriate cost framework, in collaboration with the Ministries of Finance and Social Affairs and Employment. • The AFM strengthens its agility and learning capacity.

AFM Agenda 2024 | Priorities and Key Activities 2024 8 AFM AGENDA 2024 New Legislation In 2024, (new) legislation will come into force for which the AFM must supervise or for which supervision must be prepared or intensified. This requires a significant extra effort from the AFM, for which additional financial resources are also needed. Table 1 lists the (new) tasks that will impact the AFM in 2024.

Table 1 Important (new) statutory tasks in 2024 Name | In Force | Explanation MiCAR | 2024 | From the end of December 2024, parties must have a MiCAR license to provide crypto services and must comply with MiCAR standards. This is the first step towards regulating the crypto market. In 2024, the focus of our supervision is on licensing and personnel testing. Additionally, knowledge building, preparing market parties, international cooperation, and preparation for supervision, including anti-money laundering supervision, will require capacity. DORA | 2025 | The DORA regulation focuses on increasing the cyber resilience of companies. Our supervision preparation in 2024 focuses on informing, fulfilling reporting obligations, and responding to (the most serious) incidents. The AFM conducts an investigation every 3 years at 5 institutions with high systemic relevance, including follow-up and supervision of TLPT testing (TIBER). CSRD | 2024 | The CSRD requires listed companies and large unlisted companies to report extensively on their sustainability risks and sustainability impact according to the prescribed European Sustainability Reporting Standards (ESRS). This obligation enters into force gradually starting from the 2024 financial year. SFDR | 2021 and 2023 | The SFDR has gradually introduced transparency requirements regarding sustainability. The lower-level regulation has been applicable since 2023. The imposed obligations are very specific and complex, and partly new for market parties and supervision. As a supervisor, we check compliance with the legislation and provide guidance on transparency, product governance, and suitability. More capacity is now needed for supervising this regulation than was anticipated at the time of the introduction of SFDR legislation. NPLD | 2023 | The AFM becomes the competent authority to supervise the directive on non-performing loans. Through the NPLD, credit servicers come under AFM supervision, as well as other parties servicing commercial credit. The AFM will assess license applications, conduct conduct supervision, and maintain a national register for this. DTR | 2025 | As a result of the implementation of the Accessibility Directive, the AFM must supervise compliance with new obligations for providers of banking services and financial e-commerce services regarding information provision, internal procedures, and accessibility of functions for people with disabilities.

The Ministry of Finance has adjusted the cost framework in consultation with the AFM to cover the extra costs of supervision of MiCAR and DORA in 2024. This is explained further in chapter 4: Finances.

AFM Agenda 2024 | Priorities and Key Activities 2024 9 AFM AGENDA 2024 3.1 Supervision of Financial Services Customer interest central in times of transition Major transitions have a lasting influence on society and the financial sector, affecting almost every consumer. We distinguish three transitions here: digitalization and internationalization, the transition to a sustainable economy, and finally, the pension transition. These transitions also impact the products and services offered by the financial sector, how they are offered, and our supervision in 2024. The AFM therefore states that customer interest must be central during these transitions. Placing customer interest at the center means that consumers are well informed about the financial products and services they wish to purchase and therefore do not take irresponsible risks. These transitions are also taking place in a time of persistent high inflation and rising interest rates. These macroeconomic developments also influence the choices consumers make and can bring risks, such as more expensive mortgages. Finally, the AFM pays much attention to new legislation and its effect on the sector and consumer. For example, the AFM is preparing for its new supervisory tasks under the Markets in Crypto-Assets Regulation (MiCAR).

In 2024, we aim to achieve the following with supervision of financial services: • Digitalization is used by financial service providers in the interest of the customer. For example, distribution and sales environments are clear and customer-oriented, and financial service providers offer products and services that better match the consumer's needs. Financial service providers must also ensure that digitalization does not lead to exclusion, or that less digitally skilled consumers are not left behind in this transition.