SUPERVISION OUTLOOK - HOLLAND FINTECH

 
SUPERVISION OUTLOOK - HOLLAND FINTECH
Supervision
Outlook       2019
SUPERVISION OUTLOOK - HOLLAND FINTECH
SUPERVISION OUTLOOK - HOLLAND FINTECH
Supervision Outlook 2019

Table of contents
1     Introduction                                                  5

2 About this document                                               6

3     Risks, challenges and trends in the Dutch financial sector    7
3.1   Main risks                                                    7
3.2 Tail risks                                                      8
3.3 Long-term trends                                                8

4 New legislation and regulations                                   9

5 Supervision                                                      11
5.1 Our approach                                                    11
5.2 Key priorities in our Supervisory Strategy 2018-2022           12

6 Banks                                                            17

7 Insurers                                                         21

8 Pension funds                                                    25

9 Investment firms and investment fund managers                    29

10 Payment and e-money institutions                                30

11 Trust offices                                                   31

12 Supervision in the Caribbean Netherlands                        33

Annex 1 Key Indicators                                             34
SUPERVISION OUTLOOK - HOLLAND FINTECH
4
SUPERVISION OUTLOOK - HOLLAND FINTECH
Supervision Outlook 2019

1 Introduction
Our Supervision Outlook outlines the priorities           To this end, we cooperate closely with fellow            5
we have set in our supervision of financial               supervisory authorities. We perform our prudential
institutions in 2019 with the objective of ensuring a     supervision tasks as part of the Single Supervisory
structurally and ethically sound financial sector in      Mechanism (SSM), under the final responsibility of
the Netherlands. It serves as a supplement to our         the European Central Bank (ECB). Internationally
regular supervision, which accounts for the lion’s        speaking, we cooperate closely with the European
share of our staff’s work, but is not covered in this     Supervisory Authorities (ESAs). Domestically,
publication. This Supervision Outlook is not set in       we set great store by our partnerships with the
stone: our priorities may change in the course of the     Netherlands Authority for the Financial Markets
year in response to changing circumstances.               (AFM), the Financial Expertise Centre (FEC) and
                                                          other supervisory authorities.
The economic conditions are currently favourable,
but vulnerabilities in the financial sector often build   Our policy is to inform institutions about supervisory
up especially in times of economic prosperity. ­          examinations in advance. This year marks the
Sharp-eyed supervision therefore remains                  introduction of our new digital agenda for
necessary. That said, we are aware of the                 supervisory activities, which will be placed on our
heightened regulatory requirements following              website in December. We will also regularly inform
the financial crisis, which, although necessary,          the sector about the specific timing and progress of
puts pressure on supervised institutions. We are          examinations, also by means of newsletters.
evaluating ways of increasing the efficiency of
supervision, and intend to continue on the chosen
path with respect to transparency, proportionality,
and the dialogue with our stakeholders.
SUPERVISION OUTLOOK - HOLLAND FINTECH
2 About this document

6   Chapter 3 describes the main risks, challenges          In order to provide a better understanding of the
    and trends that we have identified for the Dutch        results of our supervision, Annex 1 includes a short
    financial sector. Together with our Supervisory         overview of our ambitions for 2019, including the
    Strategy 2018-2022 published last year, these three     accompanying indicators and target values.
    aspects constitute the basis of our supervisory
    agenda for the year ahead. Chapter 4 describes          Please consult the 2019 Independent Public Body
    the imminent changes in relevant legislation and        (ZBO) budget scheduled for release in January 2019
    regulations. Chapter 5 discusses our approach to        for the financial substantiation of our supervision
    supervision, and specifies how we fill in the details   programme. The activities described in this
    of the focal points of our Supervision Outlook.         Supervision Outlook serve as important input for
    Chapters 6 through 12 discuss our supervision plans     this programme.
    and examinations by subsector.
Supervision Outlook 2019

3 Risks, challenges and
trends in the Dutch
financial sector
This section describes the main risks, challenges and trends that will have an influence                                   7
on the Dutch financial sector. Some of these are new, and others already passed in
review in last year’s Supervision Outlook and in our Supervisory Strategy 2018-2022
(see also paragraph 5.2).

3.1 Main risks

Some risks require our special supervisory attention in the year ahead. With the exception of the
vulnerabilities in the real estate markets, these risks already played a prominent role in our Supervision
Outlook 2018. They still prevail.

  Political uncertainty                  Change capacity                          Cyberattacks and IT
                                                                                  disruptions

 Brexit in particular is causing         It is important for institutions to      This has for some time been an
 more than average uncertainty.          anticipate on changing market            important risk that is demanding
 This uncertainty is first and           conditions, regulatory requirements      a great deal of attention from
 foremost affecting the institutions     and new developments, including          supervision. The likelihood and
 themselves, and also impacts            digitalisation. Financial institutions   impact of cyberattacks are most
 supervision resources, due to a         that are unable to adapt sufficiently    prominent at banks, due to the
 possible increase in the number of      to changing circumstances and do         role that they play in payments
 institutions having their registered    not manage risks adequately, could       and the risk that liquid assets
 offices in the Netherlands and the      in due course face erosion of their      are withdrawn from institutions.
 size of their activities.               earnings potential and, hence, their     Insurers and pension funds are in
                                         financial solidity.                      danger of incurring damage to their
                                                                                  reputation.

  Financial and economic                 Repricing of risks and the               Vulnerabilities in the real
  crime                                  changing yield curve                     estate markets

 Recent developments have                The trend of rising share and bond       The basis for future vulnerabilities
 underlined that involvement in          prices and the concomitant low           is often formed in times of rising
 financial and economic crime is still   level of risk premiums has increased     real estate prices. There is a risk of
 a realistic risk. Our examinations      the likelihood of a price correction.    overvaluation for instance, which
 show that financial institutions        The impact of such a correction is       may induce future losses.
 across the board still need to make     strongly determined by the speed
 a considerable effort in order to       at which market prices change
 manage cyberrisks adequately.           and may differ sharply between
                                         financial institutions.
8   3.2 Tail risks                                              In addition to this, cryptos and the underlying
                                                                blockchain technology, as a decentral phenomenon
    Tail risks, risks that have a relatively small likelihood   not subject to country borders, may potentially
    of occurring, or uncertainties that are impossible to       have lasting impact on the financial system in
    estimate, are important to supervisory authorities.         the shape of new forms of service provision and
    These risks may have a significant impact on                value relocation. And last, but not least, we expect
    financial institutions or the financial system as a         climate-related risks to increase in the years
    whole. In 2018, we reviewed research methods in             ahead. These include risks related to extreme
    consultation with the financial sector. We plan to          weather conditions, and transition risks caused by
    deploy these methods next year to identify actual           governments taking the necessary measures to
    tail risks and uncertainties in order to take action        achieve climate goals.
    at an earlier stage if these risks and uncertainties
    develop into a realistic threat to the financial
    system. This is consistent with our ambition to
    keep a close eye on vulnerabilities that may exist
    or be building up in the financial system in times of
    economic boom.

    3.3 Long-term trends

    Some trends and risks are familiar, but their main
    impact is likely to occur after one or several years
    have passed. Here you may think of fragmentation
    of the value chain in the banking sector or growing
    competition from other sectors than the traditional
    ones. We are seeing this particularly in the payment
    services segment where payment institutions and
    FinTech market players are active. Competition in
    the mortgage lending market from insurers and
    pension funds is expected to continue. This is a
    welcome development, but it may entail risks for
    the continuity of individual institutions.
Supervision Outlook 2019

4 New legislation and
regulations
For the year ahead, many changes in                     Implementation of a new pension                           9
legislation and regulations are again on                contract
the agenda. This demands a strenuous                    The coalition agreement includes the intention to
effort from both the institutions and DNB.              thoroughly review the second pillar of the pension
                                                        system. On 20 November 2018, it was announced
Implementation of Basel 3.5                             that the cabinet and the two sides of industry have
Now that the Basel Committee has reached                been unable to reach agreement on the new pension
agreement on Basel 3.5, the EU is preparing the         contract. We regret this outcome. It continues
regional implementation of the agreed standards.        to be necessary to review the pension system in
We are contributing to the European Banking             order to respond to the changing labour market,
Authority’s (EBA) impact analysis and are making        ease tensions between generations and to regain
an effort to steer the negotiations into the desired    the trust of pension fund members. At the time of
direction together with the Dutch ministry              writing this issue of our Supervision Outlook, there
of Finance. We are promoting timely, full and           was no certainty yet on possible subsequent steps.
consistent implementation of Basel 3.5.
                                                        Implementation of PSD2
Evaluation of Solvency II                               The revised Payment Services Directive (PSD2) is
The European Commission is to evaluate the              expected to become effective in the last weeks of
capital requirements and the long-term guarantee        2018 or at the start of 2019. It demands a great effort
measures of the Solvency II framework in the years      from banks and payment institutions to comply
ahead. The European Insurance and Occupational          with the new legislation. PSD2 provides scope for
Pensions Authority (EIOPA) will advise the              new market entrants and new business models. For
Commission on these issues. We will free-up             us, PSD2 means issuing new licences and adjusting
resources next year to contribute actively to EIOPA’s   our supervision of the existing market players to the
advice. We are committed to ensuring that Solvency      new rules.
II continues to provide protection to policy holders.
                                                        Implementation of IORP II
                                                        The Institutions for Occupational Retirement
                                                        Provision Directive, IORP II, will be effectively
                                                        implemented in the Netherlands in January 2019.
                                                        From then on, DNB will supervise compliance with
                                                        IORP II. In 2019, we will continue our dialogue with
                                                        the sector on compliance with the requirements
                                                        of the Directive and perform several on-site
                                                        inspections to test the level of compliance.
10   Implementation of AMLD5                                   Act on the Supervision of
     In the course of next year, the most recent               Trust Offices (Wtt)
     amendment to the European anti-money                      The new Act on the Supervision of Trust Offices
     laundering and terrorist financing legislation            (Wet toezicht trustkantoren – Wtt) 2018, which
     (AMLD5) will be transposed into Dutch law. With           is expected to come into effect in 2019, marks
     the introduction of AMLD5, exchange platforms and         a significant change for both trust offices and
     crypto wallets will become subject to anti-money          DNB alike. The Wtt 2018 includes supplementary
     laundering legislation and registration or licence        requirements for trust offices. The new law will give
     requirements will apply. DNB will be responsible for      DNB additional powers, including that of imposing
     the AML supervision of these two parties and will         higher sanctions and publication of sanctions
     give further substance to this supervision in 2019.       imposed.
     AMLD5 also introduces the obligation to establish a
     central bank account holder database. To this end,
     a legislative proposal (Wetsvoorstel verwijzingsportaal
     bankgegevens) is being prepared.
Supervision Outlook 2019

5 Supervision
5.1 Our approach                                            the working group’s report, we agreed to adopt a         11
                                                            number of recommendations and we are currently
DNB takes a risk-based and proportional approach            in the process of taking action to this end.
to supervision. We base our supervision on the              ▪▪ Insurers and pension funds will receive
institutions’ own responsibility to comply with                customised calendars of supervisory
legislation and regulations, and to manage risks               examinations and information requests planned
adequately. We perform in-depth research and                   for 2019. For banks under our direct supervision
deploy our set of instruments to induce institutions           (known as less-significant institutions), we
to change their behaviour if necessary. In case of             intend to not only share our supervisory planning
serious findings and if recovery is not forthcoming,           during the annual discussions, but to also provide
we will not hesitate to take strict enforcement                these institutions with a hard copy.
measures. We continue to concentrate on                     ▪▪ We will give institutions a longer time frame to
our objective of ensuring a sound and ethical                  respond during holiday periods.
financial sector.                                           ▪▪ We will explain even better to institutions the
                                                               reason and purpose of an examination, which
In 2018, we evaluated the possible unintentional               approach we intend to take, and the effects we
effects of new regulations introduced after the                envisage. We will improve the feedback of our
crisis (see our study entitled Proportional and effective      findings and we will, where possible, ask for the
supervision). This has led to several specific action          institutions’ feedback after completion of our
points. We recently published guidelines for the               examinations.
proportional approach of key functions for small            ▪▪ We have already put in place several digital
and medium-sized pension funds for instance. We                portals where institutions can upload documents.
intend to apply the Own Risk and Solvency Assessment           Our Digital Reporting Portal for supervised
(ORSA) reporting requirements proportionally for               institutions is a case in point. In 2017, we
insurers, so that not all institutions are by definition       launched our Digital Supervision Portal, enabling
required to submit a totally new report on their own           financial institutions to fill in and submit online
risk analysis every year.                                      applications for fit and proper assessments of
                                                               board members, licences, and declarations of no
A working group of sector representatives this year            objection among other documents. We will also
issued advice on reducing indirect supervision costs           fill in the information already known to us in our
(the costs that institutions incur in order to comply          requests for information.
with supervisory requirements). In our response to
12   5.2 Key priorities in our Supervisory                      Many financial innovations are the product of new
     Strategy 2018-2022                                         or improved underlying techniques. We are seeing
                                                                an increasing number of financial innovations based
     Last year, we published our Supervisory Strategy           on artificial intelligence and distributed ledger
     2018-2022. Our supervision for the coming years will       technology (DLT). As the supervisory authority,
     focus on technological innovation, future orientation      we find it very important to understand these
     and sustainability, and financial and economic crime.      underlying technologies and their implications
     This is how we will flesh out these priorities in 2019.    for applications based on these technologies. This
                                                                is why in 2019 we will launch a more in-depth
     Priority 1: responding to technological innovation.        examination into artificial intelligence and DLT.
     In order to allow for sufficient scope for innovation,
     an easily accessible portal at the supervisory             Digitalisation also offers opportunities for more
     authority continues to be of great importance. In          effective and efficient supervision, including quicker
     2016, DNB and the AFM together launched the                and better insights from electronically obtained and
     InnovationHub in order to provide support to               analysed data. Other examples of how we respond
     new and existing corporations having queries on            to technological innovation include taking a more
     supervision and the rules and regulations pertaining       risk-based approach, whereby relevant risks are
     to innovative financial products and services. In          identified at acceptable costs, and improving our
     2017, we launched a joint regulatory sandbox to help       response to the underlying coherence between risks.
     resolve unwanted obstacles for innovative financial        Digitalisation also offers opportunities to improve
     concepts. In 2019, we will continue, and if necessary      our own internal operational management.
     improve, our joint DNB-AFM InnovationHub and
     regulatory sandbox.

     The rise of cryptos demands an adequate response
     from the supervisory authorities. New crypto
     applications keep appearing and the crypto-
     ecosystem continues to evolve. Due to the risks
     for consumers associated with cryptos and as part
     of counteracting money laundering and terrorist
     financing, it is necessary to put in place a fitting and
     proportional regulatory framework. This is why we
     continue to be involved in exploring the introduction
     of regulations for cryptos.
Supervision Outlook 2019

By increasingly supporting operational management                                                                  13
by digital techniques, the quality of the supervision
process may be improved at unchanged, or lower
operating costs in the longer term. In order to seize
these opportunities, we launched a trajectory in
2018 to substantiate, plan and implement our
digital ambitions as described in our Supervisory         We will also devote attention to the requirement
Strategy 2018-2022.                                       for office premises to have at least energy label C
                                                          from 2023 forward. If owners are unable to prove
Priority 2: emphasising future orientation and            that their premises have energy label C or higher,
sustainability;                                           these premises may have to be closed down. This
In a dynamic environment like the financial sector,       means that this requirement will directly impact
it is essential for institutions to be able to identify   investments and loans related to office premises.
in time the impact of changes on their own                It is therefore important for institutions to know
organisation and to have the appropriate skills           which part of their business loans with real estate as
to respond effectively. In 2019, we will examine          collateral concerns offices and which energy labels
the capacity for change at a risk-based selection         these offices have.
of small banks, insurers, pension funds and trust
offices. We plan to zoom in on the capacity for           We will continue to devote ourselves in 2019
change at financial institutions with respect to          to increasing the role of the financial system in
technological innovation and being able to resolve        managing climate-related risks and funding of
persistent supervision problems. The examination          sustainable investments. This is also consistent with
will focus in particular on the role of internal          the international, European and national trends. The
supervision and middle management.                        European Commission at the start of 2018 published
                                                          an ambitious plan for financing sustainable growth,
Over the past few years, we have examined the             which will demand more action on the sustainability
climate-related risks to which financial institutions     front from financial institutions.
are exposed. We also performed a stress test, which       At an international level, we cooperate with central
revealed that a disruptive energy transition may          banks and supervisors in the Network for Greening
lead to substantial losses for financial institutions.    the Financial System (NGFS). This network with
As the next step, we will embed management of             members from five continents aims to increase
climate-related risks in the assessment frameworks        the role of the financial system in improving the
for our supervision on banks, insurers and pension        management of climate-related risks and where
funds. We will actively seek a dialogue with the          possible resolve obstacles to green investments.
sector in order to be able to learn from our mutual
experiences and best practices.
14   There are also developments to report at national        3. Close cooperation with our partners within the
     level. Negotiations are under way about the                 Financial Expertise Centre (FEC): the cooperative
     Climate Agreement, which is to facilitate halving           network including the Public Prosecution Service
     of carbon emissions from corporations, civil                (Openbaar Ministerie - OM), the AFM, the tax
     society organisations, and local authorities in             authorities, and the Fiscal Investigation and
     the Netherlands. These measures may impact                  Detection Service is intensively used to exchange
     corporations and the loans and investments that             risk indications in time and to work together in
     financial institutions have outstanding to these            the area of enforcement.
     corporations.                                            4. Developing new prevention methods: In 2018,
                                                                 we launched a new series of round table
     Priority 3: Taking a hard stance against financial          conferences with board members and experts
     and economic crime                                          employed by the FEC partner institutions, banks
     Financial institutions are still not giving sufficient      and other directly involved parties. In 2019, the
     expression to their gatekeeper role. The approach           initiatives explored should take shape. These
     our integrity supervision takes to improve this issue       include a setting up a public-private taskforce
     consists of four components.                                to counteract serious criminality, and interbank
     1. Supervision of individual institutions: we are           cooperation in the area of customer due diligence
        performing risk-based thematic and institution-          and transaction monitoring, should take shape.
        specific examinations into integrity risk
        management at financial institutions. If breaches     Our thematic examinations will focus on three
        of legislation and regulations are identified, we     specific areas, i.e. (a) the prevention of involvement
        take measures and enforce structural recovery.        of financial institutions in money laundering
        We monitor and validate recovery progress and         and terrorist financing, (b) tax risks and social
        impose punitive measures if necessary.                impropriety and (c) undermining and organised
     2. Calling responsible management to account:            crime. You will find more information on these
        board members and other senior management             subjects in the dedicated sector chapters.
        (e.g. heads of compliance or audit departments)
        and supervisory directors are called to
        account with respect to their duty to embed
        the gatekeeper function and to ensure the
        correct attitude to compliance within financial
        institutions.
Supervision Outlook 2019

▪▪ We will examine at banks and money transfer         15
  offices (exempted and not exempted)
  whether these institutions are on top of basic
  management of integrity risks in conformity
  with the requirements set by the Financial
  Supervision Act (Wet financieel toezicht – Wft and
  the Anti-Money Laundering and Anti-Terrorist
  Financing Act (Wet ter voorkoming van witwassen
  en financieren van terrorisme – Wwft). At trust
  offices we will perform a similar examination into
  compliance with Wft and Wwft requirements.
▪▪ We will assess how banks and trust offices
  specifically have fleshed out their policies and
  procedures in order to get a sufficiently clear
  perspective on the risks associated with socially
  improper actions. The management of tax risks
  associated with their customers will also be
  subjected to examination.
▪▪ In consultation with our FEC partners, we
  will launch an examination into how financial
  institutions prevent involvement in socially
  undermining and organised criminality in the
  Netherlands. This involvement concerns both
  knowingly and unknowingly facilitating money
  laundering and processing of revenues obtained
  from criminal offences (including corruption,
  drugs and human trafficking).
16
Supervision Outlook 2019

6 Banks
Despite the low level of interest rates,                 Kingdom. With respect to the latter, the European        17
banks have to date managed to keep                       Commission recently announced that – based on a
their profitability at acceptable levels.                temporary equivalence declaration – it will establish
However, it is exactly in times of economic              a transitional regime for clearing of derivatives
tailwinds that the foundations for further               via central counterparties (CCPs) in the United
problems are laid, e.g. in commercial real               Kingdom in case of a hard Brexit. At the same time,
estate markets. In addition, there are                   there is still uncertainty about the exact shape and
significant risks at play in the near future,            timing of this equivalence declaration if the hard
including Brexit and vulnerable emerging                 Brexit becomes a reality.
economies. Technological innovation and
social changes also create opportunities                 Even if an agreement is concluded about the United
and threats to business models.                          Kingdom’s exit from the EU, institutions must still
                                                         continue to prepare themselves for a changing
This demands the appropriate capacity for change         financial landscape post Brexit: a gradual transition
of banks, and unabated alertness in regular              to a new relationship with the UK will also be
supervision (especially during the annual Supervisory    accompanied by frictions and adjustment costs.
Review and Evaluation Process cycle), where the
supervisor assesses the risk management and risk         Governance and risk management
profile of banks and verifies whether these banks        Our regular supervisory practice shows that internal
have sufficient capital and liquidity. In addition to    governance and risk management is in need of
this, we will pay special attention to a number of       improvement at a large number of banks. We
specific risks in 2019.                                  believe that it is necessary to improve the design and
                                                         effectiveness of governance and risk management
Brexit                                                   at banks. We intend to devote more attention to this
The United Kingdom is set to leave the European          in the Supervisory Review and Evaluation Process
Union on 29 March 2019. Financial institutions must      (SREP) and during the regular supervision meetings.
prepare themselves for the risk of a hard Brexit. We     In addition, we plan to perform an examination into
expect supervised institutions to map out the risks      the functioning of internal supervision at a number
that are relevant to them and to manage these            of banks with a particular focus on its role as a
risks, ensuring that if the hard Brexit materialises,    countervailing power.
the continuity of their services will not be in danger
and they will not be exposed to material risks.          Exposures to emerging markets
This may for instance happen if problems with            Emerging markets are under pressure, and Dutch
the management of derivative portfolios arise,           banks with large exposures to these economies
or if derivatives transactions can no longer be          are potentially vulnerable. As a precaution, we
cleared via a central counterparty in the United         already asked banks in 2017 to maintain additional
18   capital buffers, which will remain in place as long as   Targeted Review of Internal Models
     necessary. We can also ask banks for supplementary       (TRIM)
     information, and if this information gives us cause to   The SSM will continue its Targeted Review of
     do so, we will press for additional control measures.    Internal Models (TRIM) project in 2019. TRIM is the
                                                              SSM’s initiative to examine the internal models for
     Mortgage portfolios                                      determining the required capital buffers for market
     We are observing easing of lending conditions for        risk, counterparty credit risk, and credit risks of 68
     mortgage loans at several banks. Banks are also          significant banks in Europe. In total, 206 on-site
     targeting new market segments like loans to self-        inspections will be performed. The ECB coordinates
     employed people and buy-to-let mortgages. It is          these inspections and ensures quality assurance,
     important for banks to keep managing adequately          but the majority of inspections will be performed
     the credit risks arising from these loans. These         by NCAs like DNB. ECB Banking Supervision aims to
     developments will therefore be included in the           complete the TRIM project in 2019. We will increase
     stress test that we are set to perform in 2019.          the number of our credit risk examinations in the
                                                              coming year. Here again, the ECB will be responsible
     Interest-only mortgage loans                             for coordination and quality assurance, but the
     A proportion of households holding interest-only         NCAs will perform the examinations.
     mortgages are exposed to the risk of defaulting on
     their debt, or have difficulties refinancing this debt   Simple, transparent and standardised
     when their mortgage expires, or when they retire.        securitisations
     We want to ensure that money lenders clarify this        On 1 January 2019, new European legislation
     risk to their customers, that they control it, and       will come into effect with more stringent
     actively approach their customers and point out          requirements and higher risk weights for all
     their future liabilities and possibilities to them. We   European securitisations. At the same time, a
     are closely cooperating with the AFM and the ECB         specific framework will come into effect for simple,
     from the angle of our different responsibilities to      transparent and standardised (STS) securitisations,
     force money lenders into action. We are cooperating      the risk weights of which will be increased less
     with the ECB in order to better identify and monitor     sharply. DNB will become responsible for “product
     prudential risks.                                        supervision” when the STS framework comes
                                                              into effect. This means that we will, for now
                                                              independently of the SSM, be responsible for
                                                              determining whether securitisations that the issuing
                                                              party qualifies as STS actually comply with the
                                                              set criteria. This is a new task for which a limited
                                                              increase in staffing is foreseen.
Supervision Outlook 2019

Capacity for change                                     In 2018, we organised a series of round table       19
The playing field for banks is changing rapidly.        conferences on the theme of Future State AML/
New players are entering the market, partly             CFT. Both public and private parties committed
driven by changing regulations, such as PSD2, and       to the intention of further developing a number
technological innovation. This may potentially have     of initiatives in 2019. These initiatives include
a big impact on the business models of banks. It        intensifying the operational cooperation between
demands sufficient capacity for change at banks to      banks and promoting ongoing cooperation between
anticipate and respond to the developments that         public parties and banks.
they are faced with. In 2019, we intend to examine
the main developments for business models and the       We are in favour of intensifying European
future role played by banks.                            cooperation to counteract money laundering and
                                                        terrorist financing. This is why we support the
ECB Banking Supervision                                 European Commission’s proposals to concentrate
In 2019, ECB Banking Supervision will continue          the relevant supervisory authorities with the
implementing thematic on-site campaigns,                EBA. We will include the impact of European
involving similar examinations at different banks.      developments in our supervision.
We are taking part in these campaigns.

Integrity supervision
DNB assesses whether banks are on top of the basic
management of integrity risks, and consequently
comply with the amended Wwft. In addition to this,
we examine how banks give substance to their
legal duty to design policies and procedures to the
effect of minimising the risk of becoming involved in
socially improper actions. At banks, we also assess
to what extent they control the tax integrity risks
associated with their customers, and the risks of
becoming involved in socially undermining crime.
In 2019, we will also examine the progress and
implementation of the recovery and improvement
programmes that banks have developed to
prevent involvement in financial crime. In case of
serious findings or failing recovery, we will take
enforcement action if necessary.
20
Supervision Outlook 2019

7 Insurers
The insurance sector continues to face                     Scenarios in own risk solvency                             21
serious challenges. In 2019, we will                       assessment (ORSA)
therefore challenge insurers on their                      One of our ways of assessing insurers’ strategies
strategies for the future, their ability to                for the future is reviewing their ORSA scenarios.
adjust to a rapidly changing environment,                  Scenario thinking is a highly suitable method for
and the state of their risk management.                    anticipating on an uncertain future, which makes it
This will be done by devoting specific                     an important risk management tool for insurers. We
attention to scenario thinking, to                         want to increase our understanding of how insurers
Insurtech, and to risks in the underwriting                select the scenarios that they use in their ORSAs.
channel. The results of the EIOPA stress                   In 2019, we will primarily focus on the sensitivity of
tests will be published at the end of 2018                 baseline and stress scenarios for different sources of
or in early 2019. We will address any                      profit and parameters. An important test question is
actions following up on the results of the                 whether the stress scenarios are sufficiently heavy
stress tests in our 2019 supervision plans                 and varied. Between April and August 2019, we will
for individual insurance companies. And                    analyse the ORSA reports submitted by a selection
last, but not least, the implementation of                 of institutions. The results of our analyses will be fed
the Act on the recovery and resolution                     back to these institutions in September 2019.
of insurers (Wet herstel en afwikkeling van
verzekeraars), which is expected to come                   Control of underwriting contracts
into effect on 1 January 2019 is high on our               (non-life insurance)
agenda.                                                    Distribution of insurance through underwriting
                                                           has increased over the past few years. Adequate
The wave of consolidation in the insurance sector          risk management of underwriting is essential as
is also still playing an important role. In the light of   underwriting constructions can be considered the
the above challenges, consolidation in the insurance       most extreme form of outsourcing. Insufficient risk
sector may certainly have its benefits, for instance       management of underwriting may have severe
in terms of cost saving and innovation clout.              financial consequences and cause reputational
Consolidation also brings risks, however. In short,        damage for insurance companies. In addition, we
this is an important focus area to which we will           are getting signals that underwriting portfolios
again devote a great deal of attention in 2019.            with Dutch insurance policy holders are increasingly
                                                           being placed with foreign insurance companies.
22   In 2019, we plan to establish whether Dutch              We want to achieve that insurers have a clear and
     insurance companies are on top of underwriting           verifiable picture of the impact of technological
     risks. We will pay specific attention to risks related   developments on their business models, innovations
     to data quality and outsourcing. If the results of       and the competition, and that they are able to
     our examination show that risk management is             motivate and implement their strategic decisions.
     insufficiently effective across the sector, we will,     In 2017 and 2018, we examined the sector-wide
     together with the Dutch Association of Insurers          developments and embarked on identifying
     (Verbond van Verzekeraars), and the Dutch Association    opportunities and risks at a number of individual
     of Authorised Agents (Nederlandse Vereniging van         insurance companies. We will continue this
     Gevolmachtigde Assurantiebedrijven - NVGA) issue         examination in 2019 and will also focus on including
     supplementary guidance, or use other instruments         the concomitant risks in our regular supervision.
     to induce improvement in the sector.
                                                              Recovery and resolution of insurers
     Ongoing attention to Insurtech                           The Act on Recovery and Resolution of Insurers is
     The impact of Insurtech – technological innovation       expected to come into effect in the Netherlands on
     in the insurance sector – continues to be among          1 January 2019. The purpose of the Act is to improve
     our supervision priorities. Insurtech is also getting    the resolvability of insurers. The act gives DNB the
     growing international attention, e.g. from EIOPA         responsibility to order insurance companies to
     and the European Commission. It is important for         submit their preparatory crisis plans and to exercise
     insurance companies to have a clear understanding        resolution or resolution plans. The former qualifies
     of the impact that technological developments may        as a supervisory responsibility, and the latter is a
     have on their business models and to anticipate          resolution task.
     adequately on these developments.
     Insurtech offers insurers great opportunities, but       We are committing ourselves to achieving a
     it may also lead to new forms of competition and         seamless transition to this new regime and aim to
     new entrants on the insurance market. It also            achieve in 2019 that the insurance sector becomes
     entails new operational risks or makes the existing      aware of the necessity of compiling preparatory
     operational risks more relevant. Heavy or growing        crisis plans. We will compile a good practices
     dependence on IT and data is an important driver         document on preparatory crisis plans, taking
     here. Our 2019 thematic examination will therefore       proportionality into account, and we will ask a risk-
     devote attention to data quality management and          based selection of insurance companies to draw up
     IT risks like cyber risks.                               draft preparatory crisis plans in line with these good
                                                              practices. We will assess these plans and feed back
                                                              our findings to both the companies in question and
                                                              the sector as a whole.
Supervision Outlook 2019

Integrity supervision                                   23
In 2019, we will focus on conflicts of interests for
policymakers at insurance companies. As part of
this effort, the results of the annual survey on non-
financial risks and data analyses stemming from
other sources will be used to clarify our perspective
of the risks of conflicts of interest.
24
Supervision Outlook 2019

8 Pension funds1
Pension funds are facing some of the                                 New pension contract                                    25
same developments as banks and insurers,                             The preparations for the introduction of a new
but there are also specific developments                             pension system are also playing a role in the sector.
at play for pension funds, including                                 This includes preparing decision trajectories,
the new regulatory and legislative                                   how pension fund bodies are involved and the
requirements for the pensions sector.                                implications that the new system has for pension
Having sufficient capacity for change also                           administration organisations. The operational and
remains a relevant theme for pension                                 administrative transition to a new system will
funds, due to the constantly changing                                demand a great deal of preparatory effort. The
sector environment.                                                  necessary attention for the operational framework
                                                                     is amplified by the complexity of the current
The consolidation trend in the pensions sector is                    contracts and the presence of legacy systems.
continuing, including the trend towards establishing                 This requires even more attention for effective
general pension funds (Algemene Pensioenfondsen                      management of IT and operational risks.
– APF). At the same time, we are observing that
institutions wanting to liquidate are sometimes                      Implementation of IORP II
experiencing difficulties in achieving this. In 2019, we             IORP II will be effectively implemented in the
will devote attention to identifying these difficulties              Netherlands in January 2019. From then on, DNB will
and address them where necessary. Our purpose                        supervise compliance with IORP II. An important
is to enable institutions to achieve their objectives                element of IORP II is that pension funds will be
with respect to their business models in time.                       required to install different key functions: a risk
                                                                     management function, an actuarial function and
We devote a great deal of attention to effectiveness                 an internal audit function. IORP II also includes the
and efficiency in supervision of pension funds by                    requirement to set up an Own Risk Assessment
taking a proportional approach to supervision                        (Eigen Risico Beoordeling). There is a risk that
and by being transparent to the sector about our                     institutions will not be able to comply with the
supervisory activities. In addition, we intend to                    new requirements in time, also due to the short
explore together with the sector the opportunities                   time to implementation. In 2018, we raised the
for realising direct supervision via pension providers.              issue of the IORP II requirements in several ways.
This is also in line with the recommendations made                   We gave addresses at different seminars and sent
by the working group on indirect costs.                              out a survey for instance. We will continue our
                                                                     efforts into the first half of 2019 by discussing the
                                                                     implementation of IORP II with pension funds.

1 The themes are also relevant for pension premium institutions. The text below is tailored specifically to pension funds.
26   In the second half of the year, we plan to launch         Sustainable investment
     a number of in-depth examinations in order to             Climate risks have an impact on the investment
     bring into focus the extent to which institutions         portfolios of pension funds. Office premises in the
     comply with the new requirement. The selection            Netherlands will have to carry energy label C by
     of institutions to be examined will be based on           2023. This is already impacting the valuation of real
     risk. In addition, board members proposed as key          estate and, by extension, the investment portfolios
     function holders will be subjected to fit and proper      of pension funds. We want pension funds to make
     assessments in 2019. Large and medium-sized               conscious decisions with respect to sustainable
     pension funds have until 1 September 2019 to notify       investment and we want them to act on these
     DNB of proposed appointees. Small funds will get an       decisions. They should also have Environmental,
     extra year and have until 1 September 2020.               Social and Governance (ESG)-related risks under
                                                               control. Under IORP II, ESG considerations must
     Financial position of pension funds and                   be included in risk management from January 2019
     preparation for possible curtailments                     forward.
     Most pension funds are currently able to index-
     link pensions partly and sometimes wholly again,          In the first half of the year, we will concentrate
     although it should be mentioned that this is not the      on information supply aimed at medium-sized
     case for several large pension funds. Some pension        and smaller pension funds in particular. This
     funds have not managed to meet the minimum own            for instance includes sharing good practices or
     funds requirement, however. If they do not manage         organising round table conferences. We will also
     to recover in time, these funds will have to curtail      devote attention to sustainable investment at our
     pensions in 2020 or 2021 as they will by then have        seminar on supervision of medium-sized pension
     failed to meet the minimum own funds requirement          funds. We also intend to perform a sector-wide
     for five consecutive years. The recovery plans reveal     analysis. In the second half of the year, we will
     that, unchanged from previous years, the successful       incorporate ESG in our supervision approach,
     recovery of the majority of pension funds strongly        e.g. in our risk management on-site inspections and
     depends on their investment results. DNB monitors         our investment surveys. Our on-site inspections
     that these funds continue to state their financial        will also include the underlying asset managers
     position correctly also in the run-up to a potential      to see whether they provide sufficiently detailed
     curtailment announcement. We intend to devote             information to the pension funds to enable
     extra attention to unacceptable valuations and            management of climate risks.
     balance sheet movements, and will discuss possible
     findings with these funds. In addition, several pension
     funds are in line for the 2019 EIOPA stress test.
Supervision Outlook 2019

Cyber risks and data quality in an                       Integrity supervision and behaviour                  27
environment of digitalisation                            and culture supervision
Digitalisation is changing operational management.       In 2019, we will continue to highlight the risk of
Pension funds for instance make an increasing            conflicts of interest among pension fund board
amount of information available to their members         members. We will use the outcome of our sector-
by digital means and through online channels.            wide analysis and data analyses from other sources
This entails new risks in the area of identity theft     in order to enhance our perspective on the risk of
and cybercrime. Cyberattacks on the whole are            conflicts of interest.
increasing. Effective management of operational and
IT risks is therefore becoming increasingly important.
We want to achieve that pension funds and pension
providers are adequately equipped to manage
their operational and IT risks effectively. We are
demanding structural attention to this by means of
our surveys and examinations into cybersecurity and
specific outsourcing risks for instance. And finally,
together with the InnovationHub, DNB is evaluating
the impact of new technological developments in
the pensions sector, such as applications of robotics
and blockchain technologies.
28
Supervision Outlook 2019

9 Investment firms and
investment fund managers
In view of Brexit, our focus in 2019 will be on         29
a controlled transition of activities and the
question whether new licence holders comply
with the prevailing rules and regulations. Since
the introduction of MiFID II in 2018, operating
an organised trading facility has been subject to
a licence requirement in addition to operating a
multilateral trading facility. Hence, a larger number
of institutions have come under the supervision of
DNB and the AFM. We will continue monitoring
prudential risks and potential prudential risks
emanating from trade platforms subject to a licence
requirement.
10 Payment and e-money
     institutions
30   Prudential supervision on payment                      In 2018, we launched a sector-wide identifying
     institutions in 2019 will be largely                   examination into the risk profile of currency
     predominated by licensing as part of PSD2              exchange offices. Based on the outcome of this
     and ensuring that new entrants comply                  examination, several on-site inspections will be
     with the legal requirements. We will                   performed in 2019 at currency exchange offices with
     also devote substantial resources to                   elevated inherent risk of involvement in financial
     countering financial and economic crime.               crime. These inspections will zoom in on unusual
                                                            transaction patterns and compliance with the
     New technological developments have enabled            Wwft and the Sanctions Act.
     money transfer organisations to facilitate efficient
     money transfers, e.g by using smartphone
     applications or blockchain technology. These online
     services are increasingly being offered across
     borders by players from different countries. This
     is why, in addition to our periodical transaction
     analyses and incident-driven examinations, we
     will specifically investigate compliance with the
     Wwft and the Sanctions Act with respect to online
     services offered by money transfer organisations.
Supervision Outlook 2019

11 Trust offices
In 2019, we will continue our intensive                In addition to supervision and more stringent           31
risk-based monitoring of the trust                     legislation, trust offices have a definite role
sector. Based on different data sources,               in mitigating risks of knowing or unknowing
we identify the offices with elevated                  involvement in financial crime. The trust sector will
risk of involvement in financial and                   have to demonstrate its own responsibility, both
economic crime for instance. In addition               individually and collectively, for complying with the
to institution-specific supervision, we                new requirements. Trust offices that fail to meet
will take a broader view of integrity risk             the stricter requirements because they are unable
management and the way in which                        or unwilling to boost their professionalism will
trust offices ensure compliance with                   have to cease their operations (either by means
the requirement of social propriety.                   of enforcement or of their own accord). The trust
Important ongoing examinations include                 sector is expected to continue on its path of gradual
the systematic integrity risk analysis by              shrinkage in 2019.
trust offices and socially undermining
organised crime. We also assess to what
extent trust offices have incorporated the
good practices on aggressive tax planning
issued in 2018 in their risk management.

The new Act on the Supervision of Trust Offices
(Wet toezicht trustkantoren 2018 – Wtt 2018),
which was accepted by the Dutch House of
Representatives on 5 July 2018 and is expected
to come into effect in 2019, marks a significant
change for both trust offices and DNB alike. The
Wtt 2018 includes supplementary requirements for
trust offices. For example, they must have a second
policy maker and an internal compliance function
in place, and they are required to submit obligatory
supplementary reports to DNB. The new Act will
provide DNB with more powers, it will allow us to
impose higher sanctions and we will be authorised
to publish imposed sanctions.
32
Supervision Outlook 2019

12 Supervision in the Caribbean
Netherlands
DNB is responsible for supervising             Ethical operational management                          33
financial institutions in the Caribbean        In 2019, we will continue working on improving
Netherlands. Especially with respect           awareness and mitigation of integrity risks in the
to exercising prudential supervision           financial sector in the Caribbean Netherlands,
on branch offices in the Caribbean             specifically risks associated with financial crime,
Netherlands, we must be able to rely           money laundering, terrorist financing, sanctions
on an effectively and ethically operating      regulations and corruption (bribery and conflicts of
Centrale Bank van Curaçao en St. Maarten       interest). Our examinations at banks and money
(CBCS). We have been expressing                transaction offices will emphasise adequate risk-
our concerns about this for several            based transaction monitoring and compliance with
years. Our approach aims to achieve            the notification duty for unusual transactions.
constructive cooperation with the
CBCS based on common ground. In the            Cooperation with Financial
meantime we exercise our supervisory           Intelligence Units (FIUs) in the
duties in the Caribbean Netherlands in         Caribbean Netherlands
the best possible way. In view of the          The close cooperation in 2018 between DNB and
possible introduction of a registered          FIU-the Netherlands (FIU-NL) and other countries
office requirement (the requirement            within the Kingdom of the Netherlands culminated
that a financial institution genuinely has     in a joint analysis by DNB and FIU-NL of relevant
its registered office in the Caribbean         integrity risks. We also cooperated closely with FIU-
Netherlands), we will prepare for a            NL in the area of information provision on concrete
significant expansion of our prudential        risks of money laundering and about the notification
supervision of financial institutions in the   duty pertaining to unusual transactions. We are set
Caribbean Netherlands. The subject of          to continue cooperating with FIU-NL in 2019, and
“outsourcing” is also expected to demand       plan to continue providing joint information.
extra attention.
Annex 1
     Key Indicators
34   Priority 1 – Responding to technological innovation in the financial sector*

      Ambition                                                             KI

      Effective supervision by applying technological innovation           DNB applies technological innovation to structured and
                                                                           unstructured data in order to identify and monitor risks.

      DNB is engaged in and acts on the impact of digitalisation           DNB has developed a vision on digitalisation and the
      on the financial sector, both in terms of opportunities and          concomitant risks. DNB translates this vision into supervisory
      threats.                                                             actions where relevant. DNB seeks a dialogue with the
                                                                           financial sector on opportunities and threats, including
                                                                           possible obstacles to innovation in the current rules and
                                                                           regulations.

      Enhancing the efficiency of supervision in DNB’s business            DNB computerises and digitalises processes in order to
      management by implementing new technological                         maintain effective and efficient supervision and curb indirect
      developments where possible together with the financial              costs where necessary.
      sector.

     * The ambitions and KIs relating to this priority area are provisional. As far as information technology is concerned, we are working
     on formulating a digital ambition. We are making progress on this point, and will continue working on specifying the details in 2019.
     ** The AFM and DNB have launched a joint regulatory sandbox to ensure that market operators are enabled to market their
     innovative financial products, services or business models without unnecessary obstacles. Our regulatory sandbox for innovations
     is available to all financial enterprises wanting to launch an innovative financial concept.
Supervision Outlook 2019

                                                                                                                                         35

 Target values 2019

 ▪▪ DNB has demonstrated that it is technically possible to have access to real-time data at supervised institutions. DNB
    translates this into a vision on the potential for both supervision and financial institutions for applying this technique.
 ▪▪ Two pilot projects directed at data-driven supervision, including experiments with application of machine learning launched.
 ▪▪ Concrete schedules and processes in place for upscaling of successful pilots.
 ▪▪ DNB has further developed its internal process to facilitate a case-oriented approach in order to further enhance the
    reliability and efficiency of the primary supervision process.
 ▪▪ DNB stimulates exchange of knowledge in the field of artificial intelligence and other advanced data techniques with the
    financial sector.

 ▪▪ DNB has identified the main vulnerabilities in changing value chains, and how it translates this into its supervision.
 ▪▪ DNB has translated its vision on the impact of digitalisation on the financial sector and the concomitant risks to supervisory
    actions where necessary.
 ▪▪ DNB participates in pilots and projects together with the financial sector in order to build its knowledge of the impact and
    opportunities of technological developments. Two pilots have been launched for the regulatory sandbox.**
 ▪▪ DNB has launched an iForum with representatives of DNB itself and the sector in order to boost the dialogue on technology.
 ▪▪ The DNB Academy has developed a technology training course in order to build and boost relevant knowledge among our staff.
 ▪▪ DNB has expanded its strategic secondments policy in order to ensure that knowledge on new technologies is acquired across
    the board. At least one of these strategic secondments has knowledge acquisition of new techniques as its primary goal.

 ▪▪ New technologies have been implemented in the ongoing development of the supervision methodology. DNB is making
    optimum use of univocal data definitions and re-use of data retrieved.
 ▪▪ Investments and improvements of business processes are aimed at achieving a demonstrable reduction of direct and/or
    indirect supervisory costs. Together with the sector, we have sharpened our insight into the supervision processes that lead
    to indirect costs. We have formulated business cases to assess where indirect expenses may be cut and which investment
    this would require.
 ▪▪ A pilot has been run with a supervised institution to test data access. This pilot also charted the cost gains for the institution
    and the general conclusion of the exercise was discussed with the sector.
 ▪▪ Our Digital Supervision Portal facilitates supervised institutions in reporting their outsourcing and cloud outsourcing activities
    to us.
36   Priority 2 – DNB emphasises future orientation and sustainability

      Ambition                          KI                                               Target values 2019

      DNB emphasises future             Monitoring and reinforcing the capacity          ▪▪ We reviewed the capacity for change
      orientation and sustainability.   for change of institutions, whereby                 at a risk-based selection of small banks,
                                        institutions are prompted into action               insurers, pension funds and trust offices
                                        where necessary.                                    highlighting the sustainability of their
                                                                                            business models. The results were
                                                                                            discussed in supervision meetings with
                                                                                            individual institutions and were fed back to
                                                                                            the entire sector.

                                                                                         ▪▪ DNB has developed an assessment
                                        The Dutch financial sector is on top of the         framework for management of climate-
                                        impact of climate and environmentally               related risks by financial institutions. Five
                                        related risks on the short and long-term            institutions were evaluated based on this
                                        solidity of its institutions and takes the          assessment framework.
                                        appropriate measures to manage these             ▪▪ Under this assessment framework,
                                        risks.                                              institutions that have office premises as
                                                                                            a relevant component of their business
                                                                                            model have knowledge of the energy label
                                                                                            of the office premises in their real estate
                                                                                            portfolios, or have formulated plans to
                                                                                            collect the necessary data.
                                                                                         ▪▪ In addition, for on-site inspections at
                                                                                            banks, we established how sustainability
                                                                                            may be incorporated in the different types
                                                                                            of on-site inspections, and piloted this
                                                                                            approach in two on-site inspections.

                                        DNB is a thought leader in addressing            ▪▪ International cooperation with other
                                        sustainability issues in relation to financial      central banks and supervisory authorities
                                        supervision.                                        as part of the Network for Greening the
                                                                                            Financial System has culminated into an
                                                                                            approach to further evaluate sustainability
                                                                                            issues. The objective is to perform at least
                                                                                            three examinations together.
                                                                                         ▪▪ Observations from ongoing supervisions
                                                                                            show that cooperation with the financial
                                                                                            sector and sector representatives**,
                                                                                            the AFM, policymakers and universities,
                                                                                            e.g. through the Sustainable Finance
                                                                                            Platform, boosts attention for sustainability
                                                                                            issues in the financial sector.
                                                                                         ▪▪ Knowledge of sustainability issues will
                                                                                            be verifiably conveyed in speeches and
                                                                                            publications.

     ** The members of the Sustainable Finance Platform include the Dutch Banking Association, the Dutch Association of Insurers,
     the Federation of the Dutch Pension Funds, and the Dutch Fund and Asset Management Association.
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