AFM Annual Report 2020 — AFM — NL

Dutch Authority for the Financial Markets
Annual Report 2020
Publication: April 2021

Foreword
The past year had something of a rollercoaster feel. After the outbreak of corona, the spring saw a significant economic dip, the summer brought a certain rise and relief, followed by the feared second blow in the autumn.
Pandemics have been on the list of potential risks for years, but as a country, we were not truly prepared. A great deal was asked of everyone's improvisation skills and flexibility. Meanwhile, there is some perspective thanks to the availability of vaccines. We are returning to a more normal society, although the pandemic will likely leave permanent marks, from working from home to more buffers for essential services and greater inequality. The financial markets also experienced their ups and downs. After a sharp dive in March, markets found their way back up, even breaking records. Generous government support packages and monetary easing certainly played a role in this. What remains is the uncomfortable feeling of a volatile and exuberant capital market that seems somewhat detached from the real economy. Sustainability and climate change are developments with a slower pulse, but the urgency increases with time. This urgency has also led to greater ambition. The European Union has articulated a clear climate ambition with climate neutrality in 2050; a large legislative package will give sustainability a more central role in the reporting of companies and asset managers. What does sustainability mean for the business model? What is the effect of the company on its environment? How green or grey is the invested capital? As a behavioral supervisor, we contribute to this legislation and promote implementation and compliance through knowledge transfer and, ultimately, enforcement. The AFM advocates for fair and transparent markets and contributes to sustainable financial well-being in the Netherlands. This is a timeless ambition, which we pursued this year as well - but thanks to the corona waves, primarily from our own homes. Amsterdam, 13 April 2021 Laura van Geest, Chair Hanzo van Beusekom Jos Heuvelman

Foreword
01 Developments and Strategy
06 Professional Organization
03 Supervision of Capital Markets
04 Supervision of Asset Management
02 Supervision of Financial Services
05 Supervision of Accounting and Reporting
07 Person Assessments and Measures

10 Financial Statements
11 Other
09 Organization and Governance
08 Stakeholder Dialogue

01
Developments and Strategy

In 2020, two developments had a major impact on Dutch society and the financial sector: the uncertainty surrounding Brexit and the corona outbreak.

Brexit
On 31 December 2020, the transition period ended that the United Kingdom (UK) and the European Union (EU) had agreed upon upon the UK's departure from the EU on 31 January. All laws and regulations of the European Union remained in force in the UK during this transition period. For citizens and entrepreneurs, this meant relatively little change in daily affairs. For example, all permits and European Passports – which allow companies to offer services in other EU countries – remained valid for British financial companies. This transition period has expired, and as of 1 January 2021, the European Passports of European financial institutions are no longer valid in the UK, and the European passports of British financial institutions have expired. The AFM has therefore removed them from its register. Financial companies wishing to continue offering their services in the European Union from the United Kingdom after 2020 had to apply for a license in an EU member state. As a result, a significant number of companies also applied for a license with the AFM. More institutions also mean more supervision. This means we had to anticipate increasing trading volumes. Therefore, we invested in supervising secondary markets and market surveillance, because from 2021, the trading volume and associated reporting on trading platforms with a license in the Netherlands will increase significantly.

Corona Crisis
From mid-March 2020, society in large parts came to a near standstill. As a result of the corona pandemic, the Dutch economy is going through a period of unprecedented shrinkage. The impact of the corona pandemic was also significant on financial markets. Asset prices fell sharply in the first phase of the crisis, and volatility on the stock markets rose to record levels. Spreads on corporate bonds also shot up, and credit quality was broadly downgraded. Dutch investment institutions, such as pension funds and insurers, recorded a negative return of an average of 11.7% in the first quarter of 2020. There was also a large outflow from investment funds. The corona outbreak required heightened attention for the stability of trading infrastructure, liquidity within the asset management sector, and monitoring of strong price movements in capital market supervision. Additionally, in the supervision of financial services, extra attention was paid to the effects on travel insurance and to consumers in vulnerable situations, such as in arrears management, payment problems, and overdrafting. Both the financial markets and the retail segment, which targets consumers, showed a high degree of resilience, supported by central banks and governments. The Dutch capital markets continued to function well and experienced almost no operational issues. The Dutch asset management sector also weathered the unrest well, partly due to the use of extraordinary liquidity instruments. In the retail segment, no major bottlenecks arose among insurers or pension funds, although the impact is not yet fully foreseeable. According to figures from the Dutch Banking Association, more than 37,000 consumers have received a payment pause since the outbreak of the corona crisis for the repayment of their mortgage or consumer credit. The AFM ensures that lenders have appropriate policies for granting or extending payment pauses. Additionally, we have expressed concerns about cash flow problems in SMEs. The AFM has no mandate, but calls for attention so that generic solutions today do not lead to problems in the long term. We made adjustments in our supervision. For example, we paused large requests for information and supervisory meetings with companies under our supervision where possible. In doing so, we closely followed market developments. The most important actions for the AFM organization were ensuring business continuity and adapting infrastructure and processes to working from home. We expanded and improved capacity for remote work as quickly as possible, increased opportunities for video conferencing, and facilitated the improvement of home workspaces.

AFM Mission and Strategy
After the Dutch government took measures in March 2020 in response to the corona outbreak, the AFM assessed whether the implementation of its strategy needed to be adjusted. This proved unnecessary.
With the mission and supervisory objectives, we give shape to our statutory tasks. Our mission 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.' Our supervision focuses on orderly and transparent financial market processes, pure relationships between market parties, and careful treatment of customers. The mission and external developments have led to four multi-year supervisory objectives for four supervisory areas. From 2020-2022, we apply three AFM-wide priorities in our supervisory approach, and a professional organization provides a solid foundation for achieving supervisory objectives and the mission. We want to be a leading supervisor, and that starts with a strong internal organization. Therefore, we work hard on the further renewal and professionalization of our supervision and the development of our employees.

Three AFM-wide Priorities

Proactive
By adopting a proactive approach, you as a supervisor are more effective than correcting problems afterwards. After all, when correcting afterwards, the damage has already been suffered by consumers, markets, the economy, and trust in the financial sector. Our approach is reflected in looking ahead to potential risks through risk analyses and explorations. With the external analysis underlying the annual publication 'Trendzicht', we explore relevant new trends and their impact on supervision. We also look at potentially harmful problems in areas where our mandate is not yet explicit. Furthermore, we actively contribute to the social debate about the financial sector and relevant legislation. In the supervision of the product development process, in 2020 we looked, among other things, at products whose long-term effects on consumers are difficult to understand, such as equity release mortgages, to prevent foreseeable disappointments. We also explicitly highlighted the need to expand behavioral supervision on pensions in the legislative process to reduce future risks for participants. In the supervision of financial reporting, we conducted an analysis of the half-year figures of companies, specifically looking at how they highlight the effects of the corona crisis. With this, we aim to improve the annual reporting cycle for 2020.

Data-driven
Technological developments and the exponential growth in the use of data have a strong impact on Dutch society, the financial sector, and the AFM's supervision. In 2019-2020, we started making specific supervision processes or parts of supervision processes data-driven, and embedding such an approach is gaining priority within regular supervision.
Through our data-driven supervision, we can significantly shorten the time consumers are exposed to unfair business models. A concrete example is the redesign of our supervision process for investment providers who may use an unfair business model. The data we now have can be combined with signals we receive; this allows us to take more targeted and earlier action against these investment providers. We also realize a clear picture of our pension providers based on data provided by the institutions themselves. This allows us to signal market-wide or specific risks based on trends. In capital market supervision, we receive large amounts of data, which will continue to increase because part of the trade has moved from London to Amsterdam due to Brexit. We strive to improve the data quality of this information and strengthen supervision on market abuse and insider trading with data analysis. Following a planned data request for the market view of Retail Investing, we asked ourselves in the reporting year, partly based on a signal from the sector, whether the current legislation is sufficiently structured to allow for large-scale data requests. This allows us to supervise effectively and efficiently in the interest of the customer. The law states that you may request information, but how much, how often, and which data in relation to personal data is not always clear. We want to examine how this clarity can be provided.

Influential
To effectively supervise, the AFM benefits from legislation that enables us to address the most important market and behavioral risks. Society and the financial sector are constantly changing, and so are the risks we must help mitigate with our supervision. Therefore, we are actively involved in national and international discussions about legislation.
At the national level, we work closely with the Ministries of Finance and Social Affairs and Employment to ensure legislation aligns as well as possible with market developments. In the spring of 2020, we sent out our annual legislative letter with proposals for new legislation. Additionally, we contribute to the social debate through publications and by participating in panel discussions and roundtable meetings in the House of Representatives. In 2020, this included, among other things, the discussion on the future of the accounting sector and the implementation of the new pension system. Legislation and how supervision should be maintained is increasingly determined at the European level. Financial markets are becoming more cross-border, so it is important that we engage in international discussions. We therefore attach great importance to participation in international working groups and bilateral consultations with foreign colleague supervisors. As a member of the board of the European Securities and Markets Authority (ESMA), we play a role in developing lower-level legislation for financial supervision. Thereby, we influence mandates that ESMA, the European Authority for Pensions and Insurance (EIOPA), and the banks (EBA) receive from the European Commission for this purpose. For example, we have explicitly involved ourselves in the lower-level legislation for green investments and in the evaluation of the Markets in Financial Instruments Directive (MiFID II) and the Alternative Investment Fund Managers Directive (AIFMD).

Social Value
It is important that the public, business, and government have confidence in financial markets. And that these markets operate in a clear and fair manner. Reliable and transparent (integrated) reporting plays an important role in this. With the exercise of our public task, we strive for social added value in the short, medium, and long term.
That task is defined in law and we carry it out in consultation with various (social) stakeholders.
Thereby, we respond to a world that is continuously in motion, with an eye for our sustainable capital: the employees of the AFM, our knowledge, and network relationships. In our supervision, we encourage companies to make their value creation visible by, for example, reporting integrally in their annual reports on financial and non-financial performance and the connectivity between them. This holistic approach is necessary to further facilitate the transition to a more sustainable world, economy, and financial markets.

02
Supervision of Financial Services

Financial products play an important role in the lives of consumers. These products are necessary and offer opportunities. For example, many consumers can buy a house thanks to a mortgage loan, they want to grow their wealth as safely as possible by buying investment products, and they trust that they can enjoy their pension at a certain age.
Financial products also bring risks, such as disappointing returns. The impact of these risks becomes even greater if a consumer is in a vulnerable situation, for example, due to personal or financial setbacks. To limit these risks, careful service provision is of great importance.
A consumer is also vulnerable with limited resources or expertise, or if they are unconsciously (negatively) influenced in their choices. Digital developments in the broad field of financial services can increase this vulnerability.
The vulnerability is reflected in one of the most important social objectives of financial supervision legislation, namely that financial companies treat their clients carefully. In other words: 'customer interest central', where the consequences of the corona outbreak in 2020 placed extra challenges for financial service providers.
To ensure the protection of consumers in vulnerable situations, we identified three priorities in our Agenda for 2020 that are important to us in the supervision of financial services.

Sustainable contribution to products and services with long-term effects
Organization of financial companies
Influential supervisory position on financial services
These priorities gave us focus in the investigations we conducted in 2020, in addition to ongoing activities. We elaborate on a number of supervisory activities; the other activities as formulated in the 2020 Agenda are explained further with the achieved results in the annex 'External KPIs'.

Product Development
Last year, the AFM, in the context of supervision of financial services, explicitly paid attention to the design and execution of the product development or product governance process by providers of financial products. Since 2013, this product approval and review process (PARP) has been legally established.

Agency Market
Since 2019, we have been conducting an investigation into the structure, culture, operation, and development of the agency channel as a distribution channel for private damage insurance. The goal was to form a current image of the agency channel. This extensive multiple investigation continued in 2020.
A part of that investigation focused on the design and execution of the product development process, PARP. A part of the authorized agents is also a product developer and therefore must also have a well-designed and well-functioning PARP.
Based on data from the annual market monitor, we focused on six parties where we conducted an in-depth investigation. Here, the emphasis was on auto and contents insurance. The investigation revealed that five of the six offices did not sufficiently comply with PARP standards. This meant, for example, that it was not sufficiently investigated whether the product information was understandable and that insufficient thought was given to the suitable target group for the products. We sent out a number of warning letters, as well as a norm-violating and norm-informing letter. Which measures we can impose is on our website, and the numbers for 2020 are listed in the chapter on measures. Parties in violation submitted an improvement plan to us and re-executed their review or development trajectory. Because the products in question are not complex and the Insurance Distribution Directive (IDD) was relatively new at the time of conducting the reviews, we found a finding or fine not appropriate.

Equity Release Mortgages
In 2020, an investigation was also conducted into product development by some providers of equity release mortgages. With an equity release mortgage, a person can use the equity in their home by borrowing it from a mortgage lender. An equity release mortgage is used, for example, as a pension supplement.
The characteristics of equity release mortgages and the possible vulnerability of the usually older target group make them complex and impactful products. There are also risks attached, such as the chance of a residual debt or the need to be forced to move. Precisely for this reason, it is important that providers develop these products with extra care.
The AFM concluded that the so-called product development for equity release mortgages by the investigated providers was not carried out with sufficient care. For example, insufficient thought was given to who the product is suitable for and who it is not. Also, the effects of changing market conditions, such as a drop in house prices, were investigated too limitedly. Additionally, the information provided to consumers was not always correct and clear. We see that the entire process of product development in companies can be improved. Based on this investigation, we sent three intentions to issue a directive, one warning letter, and two norm-violating letters. Based on the outcomes, the investigated market parties immediately implemented improvements in their product development and information provision. As a result, products better align with the situation of consumers. In addition to feedback to the market, we also informed consumers on the website about the possibilities and risks of equity release mortgages.

Fine for PARP Shortcomings
Shortcomings in the PARP can, in the extreme case, also lead to a formal measure. In 2020, for the first time, there was a fine from the AFM due to an investment pension that a company launched on the market several years ago. Due to the shortcomings we identified in the development process, such as weighing the interests of the consumer, the product could end up with consumers for whom it was not suitable. With a view to the new pension system, in which variable payout products, such as this investment pension, will become the norm, the sector can take note of this.

Execution Only Investment Services
With multiple investigations, the AFM examined the various aspects of online independent (execution only) investing in 2020. We looked at the customer onboarding process, the suitability test, and product development (product governance) at investment companies.

Onboarding Process
In 2020, we saw that interest in investing took off greatly, partly due to the temporary free fall of the stock market, triggered by the corona pandemic. This was the reason to conduct an exploration of the onboarding process at large online brokers. Based on transaction data, we selected three Dutch parties with an AFM license and one foreign party that provides investment services in the Netherlands via a European Passport for this investigation. With the knowledge of the companies, we created accounts to go through the onboarding process. At most of the investigated Dutch parties, we did not encounter major problems in the onboarding process. However, we saw that at these investigated companies, the suitability test and product governance standards could be better implemented to prevent products from being systematically sold outside the target group. We will take these points of attention into other supervisory trajectories. At the foreign party, we saw more risks. We subsequently shared this with the colleague supervisor responsible for the supervi