AFM Annual Report 2023

2023
10011
Digitalization
Internationalization
Pension transition
Sustainability
Report 'Climate Risks on the Housing Market' Attention for the 'grey area' Pension Event Annuity Agreement Premium Agreement Premium What is going to change?
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Attention for
DORA
Report on trading algorithms
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AFM Capital Markets Day
More attention for the strengthened sustainability reporting
Article 9
SFDR position paper
Article 8
SFDR
A small glimpse into the results of 2023:
ACCOUNTABILITY ANNUAL REPORT 2023
Annual Report 2023
In brief 2023 was characterized by contributing to a smooth sustainability transition. For example, we have set companies and accounting organizations in motion to prepare for the new directive on sustainability reporting. Furthermore, in the field of digitalization, we have intensified supervision of business operations so that customer data is secure. This type of regulation comes almost entirely from Europe: we are striving to align supervision at the European level, such as the centralization of capital market data. Finally, the transition to the new pension system was at the top of our agenda. We focused on the design of our supervision and involved the sector in this.

ACCOUNTABILITY ANNUAL REPORT 2023

1. Developments and the AFM Strategy 3
2. Supervision of financial services 7
3. Supervision of capital markets 20
4. Supervision of asset management 25
5. Supervision of the quality of accounting organizations
   and reporting 31
6. Person tests and measures 39
7. Stakeholder dialogue 42
8. AFM as a professional organization 44
9. Organization and governance 50
10. Report of the Supervisory Board 60
11. Annual accounts 67
12. Audit report of the independent accountant 91
13. Annex: External KPIs 97
    Table of Contents

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ACCOUNTABILITY ANNUAL REPORT 2023

1. Developments and the AFM Strategy
   Developments
   The year 2023 was characterized by ongoing geopolitical tensions, a gradual decline in inflation, rising interest rates, and very limited economic growth. The tightening monetary policy of central banks – including raising policy interest rates – played a major role in cooling the economy. The tight labor market prevented major shocks, and the relaxation on the housing market was short-lived.
   The vulnerability of the economy translates into the financial position of households. Government intervention has so far limited the financial consequences of high inflation and interest rate increases for Dutch households. This has temporarily prevented the expected increase in the number of people in poverty. However, concern for the vulnerable remains great and continues to attract the attention of policymakers and supervisors. Within the financial sector, high inflation and rising interest rates had a strong impact on business models and the financial valuation of assets. Volatility in the bond markets remained high due to ongoing uncertainty about the prospects for economic growth and inflation. Capital market parties therefore had to remain vigilant for abrupt price fluctuations and liquidity problems. Further digitalization The AFM has prioritized supervision of market parties that offer products easily accessible via apps and also digital marketing towards consumers. We have intensified supervision of the digital aspects of controlled business operations. We have taken steps in preparing for supervision under the Digital Operational Resilience Act (DORA). We have also taken the first steps regarding the introduction of the Markets in Crypto Assets Regulation (MiCAR) to shape supervision of crypto assets. Sustainability In 2023, we published the Sustainability Claims Guideline. We want to prevent financial products from presenting themselves as 'green' when they are not in reality. We wanted to promote that issuing entities and financial market parties adequately manage and integrate sustainability risks. We want companies to report in a coherent and balanced manner on the impact of environmental, social, and governance (ESG) factors. Furthermore, we conducted an in-depth analysis on flooding and foundation risks in the sustainability field and wrote a position paper with improvement proposals for the Sustainable Finance Disclosure Regulation (SFDR). Transition to a new pension system The transition to a new pension system in the coming years will have a significant impact on the sector and participants. Last year, in addition to conducting supervisory investigations, we focused mainly on designing the policy for our supervision. In doing so, we also provided guidance to the sector. Guidelines on new AFM supervision in the new system, such as choice guidance, the risk preference investigation, and the engagement confirmation, have been finally established. Where we saw risks, we took action, such as when communication regarding the General Administrative Measure on indexation was relaxed. We continuously focused on protecting the interest of the individual participant. For example, we believe it is important that participants are informed in time about what the transition means for them personally. We also published explorations into risk preference investigations and the 'grey area'.

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ACCOUNTABILITY ANNUAL REPORT 2023
The AFM maintained contact with the pension sector by, among other things, organizing roundtables, the Pension Event, and sending regular Transition Bulletins. Asset managers also play an important role in this system change. We therefore paid extra attention to the honest and controlled business operations of asset managers during the transition phase.
Customer interest central
Overdrafting, being under(insured), and lacking good aftercare can cause consumers to fall into financial difficulties. In the context of 'customer interest central', these themes were also a priority for us in 2023. We are in discussion with the sector and the legislator because the advice concept of the Financial Supervision Act (Wft) does not apply to the management phase of products and services. We look forward to the results of an investigation launched by the Ministry of Finance into the practical consequences and advice needs of consumers. Renewed strategy for supervision of accounting control and reporting We have further developed data-driven supervision in our supervision of the accounting sector by expanding and, where necessary, building up our data position. This has made supervision more risk-driven. Much attention went to transparency regarding the extent to which sustainability objectives are achieved and reported on, in preparation for the Corporate Sustainability Reporting Directive (CSRD). We also pointed accountants to their gatekeeper function to detect fraud risks. Data usage in and for supervision In 2023, we prioritized improving our own data position, such as in the Customer Relationship Management (CRM) system. Furthermore, requests for data from companies require a solid legal basis. We have consulted with the Ministry of Finance and the sector on that legal basis and the prerequisites, and a bill for structural data requests is being worked on. Additionally, we prioritized data for tackling cross-platform market abuse. Influencing internationally In international bodies such as the European Securities and Markets Authority (ESMA) and the International Organization of Securities Commissions (IOSCO), we advocated for closer cooperation and aligning supervision across various countries. We indicated that 'host' supervisors must be given sufficient powers. We also advocated for a European set of capital market data. We were represented at various levels in working groups or in the board of supervisors of several international consultative bodies. The AFM as a professional organization In 2023, we took steps to make the organization learning and agile by steering in short cycles and working more multidisciplinary. This makes us more result-oriented. We believe this also contributes to being an attractive employer that attracts, develops, and retains good people. Important steps were taken in IT to further develop our working method as a risk-driven and data-driven supervisor. AFM Strategy The goals the AFM has set in Agenda 2023 and the associated activities stem from our 'AFM Strategy 2023-2026'. Digitalization, internationalization, and sustainability are the trends that are decisive for the financial sector and our supervision. These form the red thread in the new strategy. In the strategy, we formulated 4 multi-year supervision goals, one for each supervision area. A solid foundation in the form of a professional
organization is of great importance here. In addition to the mission and strategy, the risk analysis in 'Trendzicht 2023' was also an important basis for determining our supervision choices in 2023.

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ACCOUNTABILITY ANNUAL REPORT 2023
Figure 1. AFM Strategy House
The AFM stands 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 result-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
Honest trading behavior and robust transparent markets.
Asset management
A robust and agile asset manage- ment sector.
Accounting and reporting
Reliable and relevant
(non-)financial infor- mation provision.
Digitalization, internationalization, and sustainability give direction to our work.
This figure illustrates the AFM Strategy 2023-2026. At the top is the mission: The AFM stands for fair and transparent financial markets. As an independent conduct supervisor, we contribute to sustainable financial well-being in the Netherlands. Below that is our working method: We work risk-driven, data-driven, and result-oriented. The three trends digitalization, internationalization, and sustainability give direction to our work. We give shape to our mission with supervision goals in the 4 supervision areas of the AFM: financial services, capital markets, asset management, and accounting. The supervision goals are: customer interest central in times of transition (financial services), honest trading behavior and robust and transparent markets (capital markets), a robust and agile asset management sector (asset management), and reliable and relevant (non-)financial information provision (accounting). The professional organization is the foundation for this: an agile and learning organization, an attractive employer, with a well-functioning IT. Risk-driven Risk-driven supervision means that we consciously weigh which risks must be addressed to what extent. Working risk-driven is necessary because we cannot continuously determine whether all behaviors are appropriate, determine whether all risks are controlled, and check whether the financial sector complies with all regulations. We periodically make choices regarding which risks are prioritized. We weigh how large the various risks are, what our authority is, and possibilities to address or not address risks. This requires a clear demarcation of where we are responsible and a reasonable overall overview of risks. The annual central risk analysis of the AFM is published in 'Trendzicht'. In addition to that, we have conducted decentralized risk analyses within many supervision areas, where risks in sub-areas are monitored. For example, based on the risk analysis within asset management, risks around liquidity risk management due to rising geopolitical tensions and interest rates were prioritized. Based on data from a market-wide request to Dutch managers of investment institutions, an analysis was conducted on the availability and appropriateness of liquidity management tools (LMTs). This analysis resulted in a number of improvement recommendations, which were shared with the market via a sector letter and a notice on the AFM website. This approach led to increased awareness among market parties, as can be derived, for example, from the interpretation questions that arose from it.

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ACCOUNTABILITY ANNUAL REPORT 2023
In anticipation of legislative changes in the UCITS directive and the AIFM regulation regarding sustainability risks, we conducted an exploratory analysis into the management of sustainability risks by managers of Dutch investment institutions. The observations from this exploration were shared with the market in 2023. The approach of exploring the market status prior to a legislative change and then sharing observations with which market parties can give practical shape to the legislative change has led to further embedding of the legal requirements in the market and contributed to removing any uncertainties. Data-driven Data-driven supervision means structurally using data and data analysis within the AFM to hold more effective supervision. By analyzing the data made available to us, we gain insights that form the guide for our risk-driven supervision. Working data-driven is a means, a way of working, and not an end in itself. It enables us to objectively answer the questions we have within our supervision and make substantiated choices in all our supervision areas. We applied this way of working last year within our supervision of trading venues. Thus, we keep a good overview of the financial instruments traded per week or day by which parties (counterparties). Deviations or underlying patterns can be grounds for further investigation. Data is also an integral part of our work within supervision of investments. For example, we analyze the behavior of retail investors based on the instruments in which they trade and at which investment company. This allows us to better interpret the signals we receive and determine targeted whether the standards we supervise are complied with. Result-oriented Result-oriented supervision means that we focus on achieving maximum impact. How we can best intervene depends on the situation. We have a wide toolkit of formal and informal instruments at our disposal. To achieve lasting results, however, we must be able to respond to the drivers and causes of behavior. Working result-oriented requires an attitude focused on learning. Our ability to intervene in a structured manner is a continuing point of attention. This also applies to measuring the results of our supervisory interventions. To steer our activities and determine whether we achieve the impact we want, we have been using impact models for important strategic trends since 2023. An impact model is a policy theory in which we explicitly state what influence we want to have on supervised companies, and what consequences that has for the consumer and the market. Afterwards, we can test whether the activities indeed had the desired impact. Thus, we learn from our supervisory practice and can better account for ourselves. In 2023, the impact model for the strategic trend 'sustainability' was established. In 2024, the models for the strategic trends 'internationalization' and 'digitalization' will follow.

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ACCOUNTABILITY ANNUAL REPORT 2023
2. Supervision of financial services
Society faces important transitions that will affect everyone. The financial sector is digitalizing rapidly, we are transitioning to a sustainable society, and the new pension system forms the biggest reform of our social system in years. These transitions change the offer of financial products and services and our supervision thereof.
'Customer interest central in times of transition' was the starting point in our supervision of financial services in 2023. Careful treatment of customers during these transitions is part of that. This means that consumers know where they stand, buy products they really benefit from, and do not take irresponsible risks.
In 2023

• The AFM conducted several investigations into responsible credit granting, to gain insight into compliance with lending norms and overdrafting, and thereby prevent financial problems due to problematic debts among consumers. These investigations led to the establishment that much is still not going well here. Resulting in overdrafting of large groups of customers. We formally and informally pointed several credit providers to this, and as a result, improvements in policy and processes were seen.
• From a study on the effects of technological developments in the insurance sector towards 2033, we were able to distill trends. We converted these trends into further investigations into, among other things, personalized pricing and embedded insurance. Parties must ensure that the duty of care is secured even in a digital environment, especially with an increase in data usage and data distribution.
• The new pension law was adopted by parliament. We again had much contact with the pension sector to express expectations about the transition and provide guidance, and to hear what is happening in the sector. We involved sector parties in what conduct supervision entails, explained the rationale behind it, and let the interpretation of new open norms take root in advance. With this, we want to signal and address sector-wide issues in time to keep the transition explainable and executable.
  Digitalization in the interest of the customer The AFM prioritized market parties that offer products easily accessible via apps and also digital marketing towards consumers in the reporting year. We want to prevent consumers from receiving nudges towards products or services that are not primarily in their interest.
  Investor protection
  Investors are increasingly choosing independent investing via brokers (execution only), and therefore we have strengthened our supervision of this population. From a newly formulated strategy, we held discussions with brokers and conducted explorations and in-depth investigations into the extent to which brokers place customer interest central in the distribution and sale of their investment products via full digital service provision. Since this often involves cross-border service provision, we also began cooperating more intensively with other European supervisors to get a good and complete picture of the service provision by these neo-brokers. Specifically, we started an investigation into the compliance function at the relevant brokers. To get consumers into investing, investment companies advertise their products a lot, also online via social media. Investment companies sometimes also use financial influencers for this. These finfluencers then recommend followers to start investing with the parties they work with. After an exploration in 2021, we followed up on the finfluencer investigation in 2023 (1-measurement) and included several other investment companies that were not previously in scope. From this 1-measurement, it appeared that the majority of parties ultimately adjusted their payment structure correctly, and where that was not the case, we will enforce appropriately after the reporting year. Advertising is subject to various rules. In an international investigation into advertising statements, we saw that companies have established their own writing guides to help their employees understand advertising legislation. We identified a number of improvement points in the investigated companies. As a result, companies stated that they would improve their process for continuous monitoring of their advertising statements. This monitoring is particularly important when companies collaborate with third parties for the distribution of advertising (such as influencers). We also saw that decision-making was not always placed at the right level and that recording this could be improved. Companies will put these matters in order as a result of our investigation. The minor shortcomings we established in the advertising statements were fed back to the companies, and they have rectified these shortcomings. This investigation was conducted with other European supervisors such as the supervisors of Germany and Belgium, and the results are also shared within ESMA. In 2023, we sent a norm-informing letter to investment funds regarding advertising, based on specific European guidelines. These have had to comply with specific European guidelines for 2 years. These guidelines promote investor protection regarding correct, clear, and non-misleading advertising statements. The guidelines contain specific norms, with attention to online aspects of advertising statements. We expect companies to be extra sharp on these advertising rules. Furthermore, we
  ourselves monitored advertising statements of financial market parties weekly, including those on social media. If information was incorrect, unclear, or misleading, we addressed parties on this. As a result, the information to consumers and investors improved. Since November 10, 2023, all providers of crowdfunding services in the Netherlands must possess an ECSPR license. ECSPR stands for European Crowdfunding Service Providers Regulation. The AFM has already issued 18 European licenses to Dutch providers. Initially, the transition period in which platforms were required to possess a license was to expire on November 10, 2022. We planned to conduct a 0-measurement in 2023 into compliance with the new regulation. Due to the extension granted by the European Commission until November 11, 2023, the AFM decided to postpone the 0-measurement to 2024. We believe it is important that digital techniques are used within an equal European playing field in the interest of the customer. Therefore, we contributed in 2023 to the development of the 'ESMA Discussion Paper on MiFID II investor protection topics linked to digitalisation', which is now being consulted in the market. In this paper