AFM Agenda 2022

AFM Agenda
2022
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Foreword
That would be nice
01 Key developments
02 Strategy
04 Finance
2022
03 Priorities and 05 Appendix key activities 2022 Read more Read more Read more Read more Read more Read more

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Spotify did not exist in 2002, so the record cabinet was still bursting with CDs. One of the well-known CDs from that year is 'Muzikanten dansen niet' (Musicians don't dance) by De Dijk. It features the appealing song 'Dat zou mooi zijn' (That would be nice). Singer Huub van der Lubbe expresses the hope in it that he can conjure away all suffering with a song. No more poverty, clean oceans, and a restored ozone layer. That would be nice... Foreword

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Coincidence or not, but in 2002 the Authority for the Financial Markets (AFM) was also founded. Could we fulfill Huub's wish? Our supervisory objective was ambitious. As an independent behavioral supervisor, we wanted – and still want – to contribute to sustainable financial well-being in the Netherlands. And to strengthen ourselves for fair and transparent financial markets. The need for an AFM was underscored by the financial news on our birthday. A small selection: a plea to make a higher mortgage interest deduction possible for first-time buyers, so that they could more easily buy a house. Investors who stated they had little insight into how their money was invested. And we became acquainted with new forms of financial crime as a result of internet banking. Mortgage lending, transparency issues, financial crime. These have been recurring themes in the financial sector over the years. And again on our supervisory radar this year. Crises are another constant. So this Agenda was drawn up in uncertainty about the course of the coronacrisis. The risks have become more diverse over the years. The role of the financial sector in sustainability is high on the agenda of European and national legislators. Also in our Agenda this development clearly comes to the fore. Whether it is about fair pricing, integrated reporting, or transparency towards consumers and investors.

Just as significant is digitalization, for the financial sector and the AFM, its supervisor. Data and information technology play an ever larger role in the sector. Known risks get a digital coat, the controlled business operations take place partly outside the financial sector thanks to outsourcing, new products (cryptos) and providers are emerging. Older than the AFM is the Dutch pension system. But the pension system is also keeping up with the times. A new system is on the way with pensions based on premiums instead of fixed benefits, with more attention to the preferences of participants and some room for choices. Participants and pension executors have to make complex and impactful choices. Transparent communication and explainable regulations help prevent disappointments. The AFM will supervise this in the new system. Can you solve suffering with a song? Huub states that he cannot find the words for that. With good supervision then? All suffering, that is impossible. But a step in the right direction… That would be nice. That push a supervisor should certainly be able to give. With policy that is connecting but fair, that is focused and objective. In this Agenda we explain how we want to shape that policy. Amsterdam, 13 January 2022 Laura van Geest chairman Hanzo van Beusekom Jos Heuvelman Linda Sas

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Annually, the AFM conducts an environmental analysis of developments that influence our strategy and the Agenda. These developments are briefly described in this
chapter. For more detail we refer to our publication Trendzicht.
01
Key developments

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Macro-economic climate
The pace of economic recovery remains shrouded in uncertainty.
Nevertheless, financial markets are optimistic. This is reflected, among other things, in high equity valuations. However, the recently rising inflation expectations can cause a tempering of sentiment. Due to the persistently low, sometimes even negative, interest rates, the search for yield continues. As a result, the prices of more risky assets rise. Among individuals, the effect of low interest rates can be seen in a strong increase in the number of investors. Here, a point of attention is that individual investors, in their search for alternatives to saving, step into investment products whose risk they do not assess well. Low interest rates make it attractive for companies to incur debt. In addition, the increased equity valuations and credit growth make financial markets more vulnerable to overvaluation and abrupt market shocks. Financial stability can thus come under pressure. Finally, due to the long-term low interest rates, the profitability and solidity of financial institutions remain a point of attention. This mainly affects insurers. Due to low interest rates, the return on investments remains low, while long-term obligations increase. This can also create a tension field in the careful handling of customer interests and the sustainable design of the business model. Housing, work, and pension The Dutch housing market remains overheated. On the rental market, supply structurally fails to meet demand. High house prices and the high debts incurred when buying a home make households vulnerable to setbacks. First-time buyers especially seem to put everything on the line to be able to buy that desired first home. They thereby risk borrowing unreasonably much. To prevent households from getting too deeply into debt, it is important that lending norms are applied carefully. The high degree of flexibilization of the Dutch labor market puts pressure on the income security of a large group of workers. And it is precisely these flexible workers who were hard hit by the coronacrisis. This underscores the need for households to maintain sufficient financial reserves to be resilient against economic shocks. In the new pension system, participants will have more personal responsibility. This pension system, for which an agreement was reached in the summer of 2020 and which will enter into force no later than 2027, will consist of premium schemes with largely variable benefits. This can have a significant impact on the amount of the pension. The transition to the new system is a large and complex process in the coming years. The vulnerable financial position of pension funds makes the transition to the new system particularly challenging. Digitalization Data are increasingly forming the core of business processes for both traditional financial parties and new entrants. Data are an important means to improve service delivery and profitability. The increasing use of data also brings risks. Points of attention include ensuring high data quality and
handling personal data lawfully and carefully. The security of data and the resilience of IT infrastructure against cyberattacks require continuous attention. The trend to outsource digital business processes makes financial enterprises more vulnerable to disruptions at their service providers. The importance of big techs for the financial sector is increasing. The technological solutions of these companies offer ease of use, but also harbor risks. From an investor and consumer perspective, the protection of customer data requires constant attention. In addition, concentration risks are emerging, because financial institutions are dependent on only a few platforms offered by big techs, for example for cloud services. There is no regulation yet to structurally counter these risks. The trend of 01

7 outsourcing of digital business processes makes financial institutions more vulnerable to incidents at their service providers. Investors and consumers are also affected by this. Investing in cryptos is taking off. Due to, among other things, the high volatility of the valuation, investing in cryptos is risky. In response to the turbulent development of the crypto market, European regulation is in the making, the Markets in Crypto-Assets Regulation (MiCAR), which creates obligations for both issuers of crypto-assets and for crypto service providers. Internationalization The regulatory framework for the AFM is largely determined internationally. For 2022, several important European legislative trajectories are on the agenda, on which the AFM will provide input, among others, in ESMA. In addition, supervisory convergence as the next step in European cooperation is having an increasing influence on our work. Now market parties can easily become active in multiple member states due to digitalization and markets are increasingly cross-border, supervisory convergence is becoming increasingly important. Due to Brexit, many new supervised enterprises have established themselves in the Netherlands. These are mainly parties active in the capital markets, such as large trading platforms, proprietary traders, benchmark parties, and managers of investment funds. The Netherlands has thereby become one of the most important trading centers for equities in Europe. Due to the increasing international character of the Dutch equity platforms, also other types of financial products are traded in Amsterdam, such as CO2 emission allowances. Furthermore, the financial services market is operating increasingly internationally. This is reflected, among other things, in the large number of foreign financial service providers that offer their services in the Netherlands via a European passport. This brings advantages, including an increase in the diversity of the offer, but also disadvantages, such as the increase in malicious providers. It strengthens the need to intensify cooperation with foreign supervisors. Sustainability Climate objectives will largely determine the social agenda for the coming decades. The efforts to reduce the CO2 intensity of our economy can translate, among other things, into stranded assets and have adverse effects on our prosperity. The financial sector will have to respond to this by adequately pricing these effects into their assets and financing models. The reporting of companies will also face more extensive requirements regarding sustainability information. Financial enterprises play an important role in the sustainability transition. Among other things, by mobilizing capital for sustainable investments and steering towards sustainability aspects in the business operations of companies. This creates a tension field. Financial enterprises are increasingly being held accountable for their role in the sustainability transition. Parties must
provide transparency about their sustainability objectives based on existing regulations. At the same time, the legislation and regulations have not yet crystallized. For example, sustainability definitions and reporting standards are still under development. Meanwhile, the inflow of new capital into sustainable investments is growing rapidly. With this growth, the attention to the risk of greenwashing also increases. This concerns the concern that raised expectations about the sustainability content of investments are not sufficiently met. 01

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Integrity
Money laundering and other financial crime undermine the integrity of the financial-economic system. The government and citizens are concerned about this form of crime. Also, trust in the financial sector can be damaged if companies, consciously or unconsciously, become involved in malicious practices. Financial institutions play an important gatekeeper function in preventing criminals from bringing illegally obtained wealth into the financial system or using the financial system to carry out illegal activities. Supervisory landscape 'Less market, more state'. Both politics and the public increasingly align themselves behind this adage. The increasing public expectations regarding the resolution of social problems by an active government may translate into similar expectations of parties in the financial sector and the decisiveness with which supervisors address malpractices. One of the sectors undergoing a change process is the accountancy sector. In the report of the Commission on the Future of the Accountancy Sector, recommendations have been made aimed at sustainably delivering high quality and thereby regaining justified trust from stakeholders. Part of these recommendations has been translated into a legislative proposal that was consulted in the summer of 2021. The new pension system and the resulting new supervisory tasks have significant consequences for AFM supervision. The system change means an expansion of our tasks. The new Pension Act, for example, contains new tasks for the AFM regarding supervision of the determination of the risk preference of the participant population and introduces requirements in the area of choice guidance. Markets are becoming increasingly cross-border and this leads to more European supervisory coordination. This applies both to the traditionally internationally intertwined capital markets and to financial services and consumer markets. As a result, European influence on the priorities of national supervisors is growing. Climate objectives determine the coming decades in important
part the social agenda.
01

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In 2019, the AFM revised its strategy. 2022 is the third and final year of our Strategy 2020-2022.
The strategy is summarized in the figure on the next
page.
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Strategy

Supervisory Area
Supervisory Objective in the market
AFM-wide
Priority
Foundation
Financial Services
Protection of consumers in vulnerable situations A robust infrastructure and integrity in trading behavior Capital Markets A sustainable business model of asset managers and careful treatment of clients Asset Management Higher quality of audits and contributions to effective incentives for accountants (-organizations) Accountancy Professional Organization Proactive Data-driven Influential The AFM advocates for fair and transparent financial markets. As an independent behavioral supervisor we contribute to sustainable financial well-being in the Netherlands. Mission 10 With the mission and supervisory objectives, the AFM gives shape to its statutory tasks. The mission of the AFM is: 'The AFM advocates for fair and transparent financial markets. As an independent behavioral supervisor we contribute to sustainable financial well-being in the Netherlands'. The mission and external developments have been translated into four multi-year supervisory objectives for these four supervisory areas. Our supervisory approach is proactive, data-driven, and influential where possible, and a professional organization provides a solid foundation for achieving the supervisory objectives and mission. Because the current strategy period expires in 2022, the AFM will renew its strategy in 2022 for the following period. 02

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03
Priorities and key activities 2022
In 2022, the AFM will give the highest priority to a number of topics.

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Transition to a sustainable society
The transition to a sustainable society is one of the most important challenges of our time. Sustainability aspects must be integrated in a responsible and careful manner into financial products and services. Consumers and investors must be able to trust that financial products and services with a promised sustainable character are indeed sustainable. Transition to the new pension system Another transition is the transition to a new pension system. The new Pension Act is expected to enter into force in 2023. The AFM supervises careful communication with realistic expectations towards participants. Protection of retail investors Given the increasing popularity of retail investing, among other things due to low interest rates, more attention is warranted there. Investing can be a good way to build wealth in the long term. The goal of the AFM is that investors are reasonably protected against taking unwise risks. Further development of due care obligation The further development of our approach regarding due care obligation is also an important theme. As social and legal norms change, the vision regarding due care obligation must also be reviewed. Preventing market abuse For market abuse supervision on the capital market, the AFM focuses on better quality of the so-called Suspicious Transaction and Order Reports (STORs), suspicions of market abuse. Broadening supervision of accounting firms Finally, much attention will go to the broadening of our supervision of accounting firms. From January 1, 2022, the AFM will fully conduct supervision of non-OOB accounting firms itself. In addition, an intensification of supervision of OOB accounting firms is being prepared. Besides these supervisory priorities, the AFM has four internal priorities:

• Drafting the Strategy 2023-2026 and reflecting on the 20th anniversary of the AFM
• Data-driven supervision: we continue the transition to a data-driven
  organization.
• IT in order: now that IT has been outsourced, the digital fitness of the
  organization is further increased.
• Employership: the new system of valuing and rewarding is being
  prepared. We are working on strategic personnel planning to remain proactive and agile as an organization.
  In this chapter, the key priorities of the AFM are elaborated for the supervisory areas financial services, capital markets, asset management, and accountancy. The strategic supervisory objectives (see chapter 2) have been translated into priorities and (ongoing) activities for 2022. Also, three AFM-wide topics are explained. These are the topics 'sustainability', 'preventing money laundering and other financial-economic crime', and 'professional organization'. 03

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3.1 Supervision of financial services
Protecting consumers in vulnerable situations.
With our supervision of providers of financial services to consumers we contribute to the sustainable financial well-being of households in Ne- etherlands. In our strategy, we have chosen to primarily focus on situations where the consumer is vulnerable; when products are complex, the consumer is less resilient, and the long-term consequences are large. Complexity Investment apps, artificial intelligence, but also social media can help consumers make financial decisions. The question is whether this always leads to the desired result. Digitalization brings risks with it, which are sometimes difficult to understand. This is due, among other things, to the complex (IT processes, but also when products or services are offered by foreign parties. Resilience Many institutions and households seem to have weathered the coronacrisis well, partly thanks to large-scale support from the government. But flexible workers and self-employed persons who work/were active in sectors hit by corona have seen their income (temporarily) disappear. As a result, their financial resilience has decreased. Households with relatively high debt levels and relatively little savings remain vulnerable to a sharp drop in asset and housing values and a confluence with so-called 'life events'. In the current overheated housing market, households are taking on higher debts in relation to their income. Also, more than half of first-time buyers take out a mortgage that covers more than 90% of the value of the home. This development poses a risk especially for first-time buyers, as they have not yet built up wealth. At the same time, we see that risks of disability or death are less often covered with insurance products. This can increase the financial vulnerability of consumers. Especially if they end up in vulnerable situations. Large long-term consequences The Dutch pension system is going to change in the coming years. The consumer can no longer rely on so-called entitlements. The contributed premium and investments will be leading. As a result, risks explicitly fall on pension participants and the amount of pension to be received becomes more uncertain. Participants in pension schemes in the second pillar also get more freedom to make certain choices regarding their pension. In the new system, but also in the transition phase, it is important that the interests of participants are taken into account in the right way. For example, it is important that (new) pension contracts are well-founded and align with the participants. It also concerns careful and realistic pension communication from providers. 03

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Priority 1: Safeguarding participants' interests in the new pension system The new Pension Act is expected to enter into force in 2023. The new pension system is fundamentally different from the old, familiar system. The new system is no longer based on fixed benefits, but on premiums. As a result, participants bear more risks through among other things variable benefits, and they must make more complex choices. Pension executors also face impactful and complex choices. The new pension schemes must not burden participants with more financial risk than they can and want to bear. This can lead to disappointment and misunderstanding. The AFM prepares the design of supervision and builds the pension team for this. In preparation for an explainable transition, the AFM ensures that pension executors inquire about the risks that participants can and want to bear. The AFM also wants communication towards participants to be careful. The expectations communicated regarding the pension must be realistic. Besides transparent information to participants about the consequences of the pension transition, it is also necessary to involve participants in time in the complex pension topics. An explainable scheme can contribute to more trust. Key activities

• For the AFM, the system change means an expansion of
  supervisory tasks. Among other things, in the area of making consequences visible for participants, mandatory choice guidance for participants, and the correctness of scenario amounts shown in communication to participants.
• Simultaneously with the ongoing policy and legislative process, the
  AFM started in 2021 to prepare the pension sector and behavioral supervision. We will continue this in 2022.
• Supervision of the execution of the risk preference research and the
  choice guidance
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