AFM Annual Report 2021

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Publication: April 2022 Authority for the Financial Markets Annual Report 2021

2 Authority for the Financial Markets Annual Report 2021 Foreword Setting up for the unpredictable Now that Omicron is receding and society is no longer defined by lockdowns, face masks, and social distancing, it is time for reflection. What lessons do we draw from the past period? Netherlands thought it was well prepared for a pandemic, but in practice, the course of events proved not to be easily predictable or manageable. The question is how we can better prepare for this. It is an illusion to think that there will never be another pandemic. The Dutch economy weathered this pandemic fairly well, although the effects were not evenly distributed. For example, the government's support package was less effective for people on flexible contracts. In addition, many young people have fallen behind in their learning. And for some entrepreneurs, the hour of reckoning is approaching as deferred taxes eventually have to be repaid. The financial markets held up well during the pandemic. But now we see inflation rising, with corresponding challenges for monetary authorities, investors, and consumers. The pandemic accelerated the acceptance of digital services, also in the financial sector. The advantages are numerous, but new risks are also emerging, as can be read in the AFM Annual Report 2021. To counter these risks, the AFM's objectives remain unchanged: protection of consumers' sustainable financial well-being, controlled business operations, and a robust infrastructure. The form of supervision does move along, however. From warnings directed at 'finfluencers' to European legislation to increase the digital resilience of the financial sector (Digital Operational Resilience Act). Climate change has not been pushed off the political agenda by the pandemic; on the contrary. The European Union has developed a detailed strategy for the European share in the solution with 'Fit for 55'. The financial markets are asked to contribute in the form of more mandatory transparency regarding ESG and non-financial information. All of this is done with the knowledge that transparency can support the necessary behavioral changes, but cannot enforce them. In the wake of Brexit, the AFM has been given a specific role as supervisor of trading in CO2 emission derivatives. In 2022, the AFM celebrates its 20th anniversary. A joyful event. We have grown from a 'supervision cowboy', a label from our early years, to a respected behavioral supervisor. But restraint in the celebration is in order. War has returned to Europe. People are losing their homes. Sanction packages hit the aggressor, but also consumers and European markets. As an organization, we must anticipate current events. As a learning organization, we are capable of doing so. Over the past twenty years, tasks have been added and the work has become more international in orientation. We are also not standing still on the organizational front. With the outsourcing of our IT, we have made another step towards professionalization this year. Creating a future-proof working environment. If 2021 has taught us anything, it is the certainty of the unpredictable. Changes follow each other at a rapid pace. And that requires a lot of flexibility. From a country, from a sector, and also from a supervisor. Can you ever be ready for that? You can certainly prepare for it. We did that in 2021. And we will continue with that in 2022. So that sustainable financial well-being is properly defined for everyone. Amsterdam, 12 April 2022 Laura van Geest, Chair Hanzo van Beusekom Jos Heuvelman Linda Sas

3 Authority for the Financial Markets Annual Report 2021 Contents Foreword Page 2 01 Developments and the AFM Strategy Page 4 02 Supervision of Financial Services Page 10 03 Supervision of Capital Markets Page 25 04 Supervision of Asset Management Page 32 05 Supervision of Accounting Firms and Reporting Page 41 06 Person-Centric Assessments and Measures Page 51 07 Stakeholder Dialogue Page 55 08 AFM as a Professional Organization Page 60 09 Organization and Governance Page 70 10 Annual Accounts Page 86 11 Other Data Page 111

4 Authority for the Financial Markets Annual Report 2021 01 Developments and the AFM Strategy

5 Authority for the Financial Markets Annual Report 2021 01 Developments in 2021 In 2021, we as a society gradually had to learn to live with the presence of the coronavirus. With strong growth of almost 4%, the economy showed resilience, although various sectors were dependent on government support packages. It remains to be seen how the affected sectors will hold up when this support ends. Due to production and supply problems in industry and rising energy prices, inflation reared its head in the autumn of 2021, causing a reversal in market interest rates. These have been rising slightly since then. The mood on the financial markets Despite everything, the financial markets were optimistic. In 2021, the AEX index exceeded the 800-point mark. Consumers were looking for returns. Because interest rates remained persistently low and sometimes even had a negative value, more and more people switched to investment products. Our consumer monitor showed that the number of households investing increased by no less than 12% in 2021, to a total of 1.9 million households. The many investment apps made it easy to get started, and the ever-rising stock markets acted as a flywheel. The digital environment, together with one European internal market, also contributes to the fact that Dutch customers are increasingly easily served by foreign providers. This highlights the importance of good cooperation with foreign supervisors and aligning supervision (supervisory convergence). Investing in crypto took off. Investing in crypto is risky due to, among other things, the high volatility of valuation. The AFM currently has no legal possibilities for supervision of this market. In response to the turbulent developments in the crypto market, European legislation is in the making, which creates obligations for both issuers of crypto-assets and crypto service providers. In 2021, following an investigation into the behavior of execution-only investors, we repeated our warning regarding crypto that we advise against putting money into crypto that is needed for short- or longer-term goals. The low interest rate also meant that companies dared to take on more debt. Together with the sharply increased stock valuations, this has made financial markets more vulnerable to negative market shocks. This means an increased risk to financial stability. Heated housing market The Dutch housing market remained overheated in 2021. In the third quarter of 2021, existing homes for sale in the Netherlands were on average 19% more expensive than a year earlier. On the rental market, the supply structurally fails to match demand. The high house prices and the high debts incurred when buying a home made households vulnerable to setbacks. First-time buyers seemed to be putting everything on the line to be able to buy that desired first home, with the risk of borrowing unreasonably much. Careful application of loan norms is therefore of the utmost importance to avoid risks. Brexit The Brexit transition period ended on January 1, 2021. For the financial sector, this meant concretely that it was no longer possible to provide services from the United Kingdom in a specific EU country without a license from an EU member state. For this reason, many British financial institutions applied for a license in an EU member state. In the 2020 annual report, the AFM already paid much attention to the organization's preparations for supervision. A large number of financial institutions have also actually chosen to apply for a license in our country and serve the European continent from here. These licenses proved to be actually used from 2021 onwards. In the Netherlands, for example, several large trading platforms and traders have been added. This also means that these institutions and markets (largely) fall under our supervision. Amsterdam now occupies a prominent position within the European capital market: in January, more shares were already traded directly on the Amsterdam platforms than in London. Trading in bonds also shifted from London to Amsterdam. Finally, in February, trading in emission derivatives also came to the Netherlands, which forms an important part of the EU climate plans. Because more capital market parties have settled in the Netherlands, the role of the AFM as a supervisor, and also in international policy discussions, has increased.

6 Authority for the Financial Markets Annual Report 2021 01 AFM Strategy 2020-2022 Our mission gives shape to our legal tasks: '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 is focused on orderly and transparent financial market processes, pure relationships between market parties, and careful treatment of customers. For the period 2020-2022, the AFM has formulated four multi-year supervisory objectives in its strategy, one for each supervisory area. To be a proactive, data-driven, and influential supervisor, a solid foundation in the form of a professional organization is of great importance. In addition to the mission and strategy, the risk analysis in 'Trendzicht' was also an important factor in determining our supervisory choices in 2021. The current strategy applies to the period 2020-2022. Preparations for revising the strategy for the period 2023-2026 started in 2021. Figure 1: This figure illustrates the AFM strategy 2020-2022. At the top is the mission: The AFM advocates for fair and transparent financial markets. As an independent behavioral supervisor, we contribute to sustainable financial well-being in the Netherlands. We give shape to this mission with supervisory objectives on the 4 supervisory areas of the AFM: financial services, capital markets, asset management, and accounting. The supervisory objectives are: the protection of consumers in vulnerable situations (financial services), a robust infrastructure and honest trading behavior (capital markets), a sustainable business model of asset managers and careful treatment of clients (asset management), and higher quality of audits and contributions to effective incentives for accountants (accounting firms) (accounting). We want to achieve these goals by: being proactive, data-driven, and influential. The professional organization is the foundation for this.

Supervisory Area Supervisory Objective in the Market AFM-wide Priority Foundation Financial Services Protection of consumers in vulnerable situations A robust infrastructure and honest 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 (accounting firms) Accounting 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

7 Authority for the Financial Markets Annual Report 2021 01 Three AFM-wide Priorities Proactive The same applies to a supervisor: prevention is better than cure. Ideally, as a supervisor, you are on the trail of possible problems early. By signaling these in time and acting on them, the damage to consumers, markets, the economy, and confidence in the financial sector can be limited. The AFM therefore also uses risk analyses and explorations to look as far ahead as possible. Every year we publish important new trends and developments in 'Trendzicht'. The most recent edition of Trendzicht contained specific risk maps for the different supervisory areas. Naturally, the gaze is also directed forward in supervision itself. This proactive attitude is reflected, among other things, in our preparations for a new pension system, including emphasizing the importance of behavioral supervision. Our studies on consumer behavior are used in supervision, for example when it comes to a digital choice environment. In 2021, we published principles for consumer behavior insights. With this, we encourage financial enterprises to use insights into consumer behavior in the interest of consumers, so that these insights contribute to sound financial choices. We also conducted an exploration into the emerging phenomenon of 'finfluencers' who do not directly fall under our mandate but play a large role in the increasing number of execution-only investors. In our supervision of capital markets, supervision of Suspicious Transaction and Order Reports (STORs) has been intensified. This is intended to ensure more and better quality reports of suspicious transactions by institutions. Our vision in the field of the Markets in Financial Instruments Directive (MiFID) (consolidated tape, illegal Multilateral Trading Facility (MTF) and Payment for Order Flow (PFOF)) and the various requests – for example, regarding market abuse prevention – are examples of proactive action. They are examples of quickly responding to the changes taking place on the capital market. Within the supervision of asset management, we assess new entrants (license applicants) and offerings (new funds) to see if they 'meet the bar' before they are allowed to operate on the market. In our supervision of accounting firms and financial reporting, we conducted research into the working methods of supervisory boards (rvc's) of large accounting firms and their impact. The rvc supervises, among other things, the quality objectives and whether an accounting firm makes decisions in the public interest. With the handles in our report, rvc's can improve their internal supervision.

Data-driven The AFM started in 2019 with making specific supervision processes or parts of them data-driven. Making our supervision more data-driven has priority. In 2021, we started to give data-driven supervision a structural basis within the organization. An example of data-driven work is the signaling of risks in damage insurance through periodic monitoring based on a dashboard. This allows us to see risks earlier: we get faster and better signals that point to possible individual and market-wide harmful movements that require further analysis and where we act if necessary. Furthermore, we used data to monitor the effects of our interventions. We looked, for example, at the activation of consumers with a repayment-free part of the mortgage. We then discussed the results of these studies with parties under our supervision. Fund reports are largely automated and data-driven assessed. We also use data-driven tools in our risk monitoring and prioritization. In addition, with the transfer of reporting from the Alternative Investment Fund Managers Directive (AIFMD) to the AFM, the input of data has been improved and facilitated for the market. To be able to work data-driven, it is of great importance that the quality of the data the AFM receives is good. Within the framework of the European Securities and Markets Authority (ESMA), we have worked to improve the quality of reports from the AIFMD. In this way, we have a good picture of developments in the asset management sector not only nationally but also internationally.

8 Authority for the Financial Markets Annual Report 2021 01 For our supervision of accounting firms, we developed a methodology for risk-based supervision in 2021. This relies largely on qualitative and quantitative data, with which we can deploy supervisory capacity where the risks are greatest. To this end, we request data, to which accounting firms can contribute on a voluntary basis. Among other things, based on the information from the data pilots, we bring trends, developments, and risks into view. With this, we have also determined our supervisory deployment for 2022. The market image is adjusted every year based on the latest quantitative and qualitative data. In our requests to the market, we sometimes have to deal with sensitive data. Here we keep an eye on responsible data use and for the various laws that are important here, both for our work and for the protection of personal data. Think of the General Administrative Law Act (Awb) and the General Data Protection Regulation (GDPR).

Influential For a supervisor, it is important that the legislation makes it possible to solve the most important problems. We must be able to continue to test whether the existing framework provides sufficient handles to perform our role well. We advocate for a suitable legal framework. We do this by being actively involved in national and European discussions on legislation. In the Netherlands, we have close relations with the Ministries of Finance and Social Affairs and Employment (SZW). In the annual legislative letter, we indicate which topics are important for the current legislative framework. In addition, we contribute to the social debate with publications and by participating in panel discussions and roundtable meetings in the House of Representatives. In 2021, AFM representatives participated, among other things, in roundtable meetings on digitalization, dividend stripping, and financial stability. The AFM has also assisted the department with advice from an independent role in the legislative process of the Future Pensions Act, issued consultation responses, and, at the request of the Ministry of SZW, conducted a supervision test. Much legislation for the financial sector comes from Europe. Here it is also increasingly determined how European supervisors must supervise. The AFM has indicated in various publications in 2021 what we consider important in new legislation and regulations. For example, we published a non-paper with the Ministry of Finance outlining the Dutch input for the Retail Investment Strategy. We also published a report in the lead-up to the revision of MiFID II/MiFIR. The AFM is a member of the ESMA Board. In addition, an AFM board member chairs the ESMA Standing Committee focused on aligning supervision within Europe (supervisory convergence). We attach great value to our participation in various international working groups and bilateral contacts with (inter)national colleague supervisors. We therefore participate in European and global international organizations on all supervisory areas of the AFM (such as EIOPA, EBA, IAIS, IOSCO, IFIAR). The AFM can have a role in the management of an international organization, but is also often represented in the underlying Standing Committees or working groups. We also work closely with other supervisors. For example, in 2021, together with the French supervisor AMF, we drew attention to the risks and possible solution directions regarding cross-border services.

Evaluation of AFM as a zbo The financial behavioral supervision as performed by the AFM is of good level. We are a professional and thorough supervisor who thereby contributes to the proper functioning of the Dutch financial markets. This was the conclusion of research bureau KWINK group after the five-yearly evaluation of the AFM as an independent administrative body. We take the 9 recommendations to heart so that we continue to learn, grow, and improve. For example, one of the points of attention is the predictability of intervention by the AFM. This does not always appear clear to the sector. We can better indicate at which risks we intervene and at which we do not. Another point is that, according to the researchers, more benchmarks are needed to determine whether investments in data innovations are useful and necessary. It is also recommended to make agreements with other supervisors regarding the request for data from financial institutions. Another point is that the legal framework of AFM supervision contains many open norms. The researchers recommend developing a standard approach to periodically review open norms. We will work with the recommendations. The research was conducted on behalf of the Ministry of Finance for the period 2016-2020. The main question was: 'To what extent is the execution of the zbo tasks by the AFM, as well as the associated expenditures, effective and efficient?' KWINK group answered this question based on the 6 principles of good supervision and through interviews with employees, board members, stakeholders, and document studies.

9 Authority for the Financial Markets Annual Report 2021 01

10 Authority for the Financial Markets Annual Report 2021 02 Supervision of Financial Services

11 Authority for the Financial Markets Annual Report 2021 02 With the supervision of financial services, the AFM aims to prevent problems for consumers. Our focus is on situations where the consumer is vulnerable: when products are complex, consumers are less resilient, and the long-term consequences are large. For example, in 2021 we conducted research into management in case of repayment arrears by consumers in consumer credit and mortgage credit. We also conducted research into private investors who often enter the investment market without advice using apps. Furthermore, we drew attention from insurers and consumers to the coverage of damage caused by extreme weather, caused by climate change. And we called attention to the opportunities and risks of personalized pricing of insurance premiums. The arrival of the new pension system has required much effort within the supervision of financial services. Results • With a number of starting points, we helped market parties on how they can place customer interest more centrally in the case of payment arrears in both mortgage and consumer credit; consumers can thus keep sight of a debt-free future in a reasonable time frame, even if possible payment problems arise due to the corona crisis.