SUPERVISION OUTLOOK - HOLLAND FINTECH
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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 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.
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).
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.
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.
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.
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.
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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