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Supervision Outlook for 2018 Contents Introduction 4 About this publication 5 1 Main risks and challenges in the dutch financial sector 6 2 Cross-sectoral 9 3 Banks 18 4 Insurers 21 5 Pension funds 24 6 Investment Firms and Investment fund managers 29 7 Payment and e-money institutions 31 8 Money Transfer organisations 32 9 Trust Offices 33 10 Supervision in the Caribbean Netherlands 35 Annex 1 Our Supervision: Mission, ambitions and core values 36 Annex 2 Schedule for 2018 supervisory examinations 38 Annex 3 Key Performance Indicators for 2018 40
Introduction 4 Our Supervision Outlook outlines the priorities we We observe and listen to get to know the issues at have set and examinations we plan to conduct as play for our national and international stakeholders. part of our supervisory remit in 2018. It describes the This is why we discussed a draft version of this subjects to which we will devote extra attention in Supervision Outlook with representatives from 2018, both in specific sectors and across sectors. different segments of the financial sector on 22 September 2017 as part of our budget preparations Financial institutions must be never cease to be alert for 2018. They informed us that they share our and adaptable, as risks and challenges are abundant. views of current developments and areas meriting This calls for strong and sound financial institutions attention. We have incorporated their suggestions that are capable of meeting their obligations and where possible. commitments, now and in the future. We are committed to fostering a solid and reliable financial This Supervision Outlook is not an exhaustive system and preventing that financial institutions timetable of all our work scheduled for 2018. It is become involved in financial and economic crime. supplementary to our ongoing supervision activities, The Dutch economy has been recovering in recent describing our key focus areas and what we call our years, and the financial crisis is now well and truly thematic examinations. Obviously, we will remain behind us. The single most important takeaway on the lookout for newly emerging issues. After all, from the crisis is that we should all be alert to effective supervisors are always alert to new newly emerging risks – financial institutions and developments. supervisory authorities alike. We work closely with other supervisory authorities to achieve our supervision objectives. We perform our prudential supervision tasks as a partner in the single supervisory mechanism (SSM), under the final responsibility of the European Central Bank (ECB). Domestically, we set great store by our partnerships with the Netherlands Authority for the Financial Markets (AFM), the Financial Expertise Centre (FEC) and other supervisory authorities.
Supervision Outlook for 2018 About this publication This edition of Supervision Outlook describes To provide insight into the supervision results, 5 the subjects to which we will specifically devote Annex 3 presents the key performance indicators attention in 2018 and the impact this will have on (KPIs) and target values for 2018. the Dutch financial sector. We will address these subjects both in our ongoing supervision activities Please consult the 2018 Independent Public Body and in the thematic examinations that we will Budget scheduled for release in January 2018 for describe here. the financial substantiation of our supervision programme. The activities described in this Section 2 describes the main risks and challenges Supervision Outlook form its basis. that we have identified for the Dutch financial sector. They are the basis for our supervisory agenda, and will be the focus of our regular supervision in the year ahead. Section 3 describes priorities and examinations of a cross-sectoral nature. The remaining sections address the implementation of the supervisory agenda in the different sectors. Our goal is to communicate the schedule for our supervisory examinations as early as possible. In addition to the general schedule in Annex 2, which is as detailed as possible, we will also regularly inform the sector about the timing and progress of examinations, also by means of newsletters. We will of course promptly inform institutions on an individual basis about the examinations for which they have been selected. Meanwhile, we are committed to coordinating our examinations even better than before.
1 Main risks and challenges in the dutch financial sector 6 We have identified the following six risks and challenges for the financial sector: Insufficient capacity Interest rate trends: Increasing digitisation and for change low rates and sudden cyberattacks increase Financial institutions that are The financial sector is exposed Increasing digitisation places unable to adapt to changing to the risks of both persistently significant demands on the circumstances could in due low rates and a sudden increase administration of IT systems course face erosion of their in interest rates. and the control of data-related earnings potential and, hence, operational risks. Within the their financial soundness. abundance of IT-related risks, cyber risk is considered a fast- growing threat. Cyber risk differs from other IT risks in that external parties with malicious intent seek to steal, disrupt or change customer-related and other data stored in IT systems. Financial and economic Political and geopolitical Regulation: implementation crime uncertainties and unintended effects The management of At the global level, there are Since the financial crisis, the integrity risks in the financial still considerable uncertainties, regulatory burden has grown in sector could be improved witness the developments terms of requirements, intensity and therefore requires in the Middle East and and scope. New requirements undiminished attention. This North Korea. In Europe, have made the financial sector should prevent Dutch financial the implications of Brexit are more resilient, but institutions institutions from facilitating, still uncertain, and political may find it a daunting task to unintentionally or otherwise, shifts have occurred. These comply with these new rules money laundering, terrorist uncertainties pose risks to the in time. The risks attendant on financing or the violation of global economy and, hence, expanding regulation are that sanction rules. Such facilitation to the financial sector. rules may conflict or future may damage confidence in the implementation may increases sector and harm its reputation. uncertainty. Also, financial institutions that act in violation of the rules could face high fines and claims for compensation, which exposes them to significant prudential risks.
Supervision Outlook for 2018 Overview of examinations scheduled for 2018 7 Cross-Sectoral Pension funds Responding to technological innovation ▪ Well-balanced financial commitments and ▪ Scope for opportunities: innovationhub and transparency risks 1 and 2 regulatory sandbox risk 1 ▪ Future orientation risks 1 and 2 ▪ Controlling risks: information security risk 3 ▪ Sound pension administration amid increasing digitisation risk 3 Future orientation and sustainability ▪ IORP II-readiness risks 1 and 6 ▪ Capacity for change risk 1 ▪ Climate-related risks risk 1 ▪ Tail risks ▪ Unintended effects of legislation and Investment firms and investment fund regulations risk 6 managers A hard stance against financial and economic crime ▪ Future orientation of pension asset ▪ Anticipating changes in legislation and managers risk 1 regulations risks 4 and 6 ▪ Systematic integrity risk analysis (SIRA) risks 4 and 5 ▪ Terrorist financing and violation of sanction rules risks 4 and 5 Banks ▪ Review of internal models (trim) ▪ Credit risk ▪ Stress test for banks risks 2 and 5 ▪ reventing bank involvement in financial P Risks and economic crime risk 4 Risk 1 Insufficient capacity for change Risk 2 Interest rate trends: low rates and sudden increase Risk 3 Increasing digitisation and Insurers cyberattacks Risk 4 Financial and economic crime ▪ Opportunities and risks of insurtech risks 1 and 3 ▪ risks 1 and 2 Risk 5 Political and geopolitical Insight into how to determine net capital generation uncertainties ▪ Insight into technical provisions and risks 2 and 6 experience mortality risk 4 Risk 6 Regulation: implementation and ▪ Set-up of compliance function unintended effects
Supervision Outlook for 2018 2 Cross-sector examinations Simultaneously with this Supervision 2.1 Responding to technological 9 Outlook, we will also publish the innovation Supervisory Strategy for 2018-2022, which Innovative technologies impact the entire financial charts the course for supervision in the sector. Our role is to provide scope for technological years ahead and includes the following innovation to ensure that the financial sector three focus areas: remains diverse and competitive and services can be further improved. At the same time, technological 1. responding to technological innovation; innovation can shake up institutions' business 2. emphasising future orientation and models, which is why we are pressing for future- sustainability; proof and sustainable business models. Increasing 3. a hard stance against financial and digitisation also gives rise to new risks: vulnerability economic crime. to cybercrime is growing, new players are changing the financial landscape, and the service chain is Our supervisory divisions will place becoming increasingly fragmented. additional emphasis on these focus areas, both in our cross-sectoral examinations and in our sector-specific priorities and pelen op examinations. This section discusses our cross-sectoral activities in these focus hnologische areas for the year ahead in more detail. nieuwing
10 We keep reshaping our supervisory approach Controlling risks: information security to match the new playing field, by leveraging Technological innovation and increasing digitisation the appropriate means, expertise and skills. make the operational management in the financial Our Supervisory Strategy 2018-2022 discusses the sector more vulnerable due to cybercrime. Growing impact of technological change on the financial digitisation and interdependencies throughout sector and how we translate this to our supervision. the financial chain mean that cyber risks can Below, we will set out how we want to provide affect financial stability. A potential attack on scope for new opportunities and emphasise confidentiality, integrity or availability of payment enhanced risk control. services will therefore have a big impact – data could be disclosed and confidential information Scope for opportunities may fall into the wrong hands. At the same time, A joint initiative of the AFM and DNB, the cyberattackers are refining their techniques, meaning InnovationHub has since 2016 provided support that their attacks are becoming increasingly complex. in queries market participants may have about Whereas they used to concentrate on direct supervision and regulations relating to innovative customer fraud, advanced attackers increasingly financial products and services. Together with single out financial institutions and chains of the AFM, we also launched a regulatory sandbox. institutions, rather than specific products or channels. This means that if financial institutions want to If one institution's operations or services are launch innovative concepts, but cannot reasonably interrupted, this may impact other institutions in the be required to comply with specific policies, laws chain, and the aggregate impact will grow. Within or regulations, we explore the leeway that the the range of IT-related risks, cyber risk is considered law offers in terms of compliance. We also revisit a fast-growing threat. This is due for example to existing policies, amending them where needed. concerns about the adequacy of the institutions' We will continue developing the InnovationHub and own technological systems and the impact of the regulatory sandbox in keeping with the latest cyberattacks. This is why we identified increasing developments. digitisation and cyberattacks as a main risk for 2018. This subject is also increasingly in the spotlight internationally.
INANCIËLE INSTELLINGEN Supervision Outlook for 2018 We urge institutions in all segments of the 2.2 Future orientation and 11 financial sector to raise the level of their cyber sustainability risk controls. We have been examining for several The pace of changes in the financial sector is years how financial institutions control information accelerating. It is important, however, that they do security risks, and will continue to do so in 2018. not occur abruptly and uncontrolled, in order to We will inform you in due course about the detailed safeguard the stability of the financial system. timetable for our examinations. Future-oriented financial institutions take Besides performing examinations, we increase their strategic decisions in time and are able to awareness among financial institutions of the respond quickly to economic, technological and importance of controlling cyber risks by hosting political developments. Financial institutions that seminars and round table sessions, and by providing are incapable of adapting in time may run into information and issuing guidance documents. difficulties. For example, a seminar for insurers and pension funds is scheduled for 18 January 2018. Capacity for change Financial institutions that want to look to the future must develop a deep understanding of how new trends will affect them. This understanding will enable them to make realistic strategic decisions that contribute towards their sustainability, both in terms of financial performance and risks, and from the 3 perspective of ethical operational management. uren op oekomstgerichtheid duurzaamheid
12 Often, institutions experience a sense of urgency Climate-related risks and have the willingness to change but, crucially, Financial institutions must increasingly factor in the they must also have the skills to identify the consequences of climate change and the transition changes that are needed and to successfully to a carbon-neutral economy. This is the conclusion embed these changes in their business models, of our recent research into the impact of climate- organisation and corporate culture. Insufficient related risks on the Dutch financial sector. capacity for change could be due to an unclear There are two categories of climate-related risks: change vision, a lack of visibility on the part of (1) physical risks arising from climate-related damage the organisation's executive leadership that such as wind and hail storms, and flooding; and owns the change, or ambiguity in how the vision (2) transition risks resulting from the transition to a is reflected in visible actions. The attitude of an carbon-neutral economy. institution's board members may also play a role, for instance if they focus too much on the short The impact of these risks is diverse and is being felt term. As a consequence, institutions may not increasingly strongly in a growing number of areas, implement the necessary changes, or will be too including in the financial sector. As the supervisory late in implementing them, which will affect their authority, we therefore intend to embed climate- financial soundness or integrity in the longer run. related risks more firmly in our supervision with the ultimate aim of ensuring long-term financial stability. We want to stimulate financial institutions¹ ability We intend to take the following steps in 2018 to embed to identify in time the changes that are needed climate-related risks more firmly into our approach to and to implement them successfully. In 2018, supervision. We will incorporate climate-related risks we will investigate change capacity among eight in our assessment frameworks and address them in different types of financial institutions, using a our interviews with supervised institutions. We will methodology jointly developed with the AFM. continue working on the implementation and further We will be zooming in on financial institutions development of climate stress tests. For example, that face an important change or have started a we are currently conducting a climate-related stress major transformation. We will inform the relevant test at non-life insurance firms and we are working institutions of our findings and may share them on developing a stress test for transition risks, which with the sector as a whole. focuses on the impact of an energy transition on the sector as a whole. 1 DNB report "Waterproof? An inquiry into climate-related risks for the Dutch financial sector", October 2017 https://www.dnb.nl/en/news/news-and-archive/dnbulletin-2017/dnb363837.jsp
Supervision Outlook for 2018 Tail risks We launched an examination into unintended 13 A financial crisis often comes from an unlikely effects of regulation in 2017. We assessed whether corner, relevant signals are picked up insufficiently, regulation has the unwanted side effect of too late or not at all. These risks, whose likelihood is increasing the prudential risks to which financial considered comparatively small and which may even institutions are exposed. Specifically, we are looking go undetected, have a potentially large impact on for answers to the following questions. financial institutions or the system as a whole. They ▪ To what extent do changes in capital are also referred to as tail risks. requirements cause institutions to modify their operations? We aim to improve our understanding of the ▪ To what extent does the regulatory burden capabilities that financial institutions have to detect result in a loss of focus on strategy and risk tail risks accurately and in time. This is why we will management? inventorise and analyse the methodologies that ▪ To what extent does regulation affect market institutions use to detect these risks, in consultation access and organisation? with sector participants and experts. Over the course ▪ To what extent can supervision be made more of 2018, we will inform the sector about the project's proportional? progress and produce a results report. We expect to publish the outcome of this Unintended effects of regulation examination, as well as recommendations for The regulatory burden has grown sharply in terms of optimisation of laws and regulations, in early 2018. requirements, intensity and scope since the financial crisis. Stricter requirements have the immediate effect of making the financial sector more resilient, but they also raise the likelihood of unintended indirect effects, which increase the prudential risks for financial institutions or the system as a whole.
14 2.3 Taking a hard stance against We emphasise that financial institutions themselves financial and economic crime are responsible for ensuring they can safeguard The third focus area in our Supervisory Strategy for ethical operational management and prevent 2018-2022 is financial and economic crime. Financial involvement in financial and economic crime. institutions play a key role in preventing money We have noted improvements in this regard, laundering, corruption, terrorist financing, insider but more effort must be made across the financial trading, violations of sanction rules, tax evasion and sector. Only too often does our supervisory practice other crimes. show that statutory requirements are seen as a box- ticking exercise and complied with while keeping to the bare minimum. We expect institutions to place the ultimate responsibility for regulatory compliance more clearly with the management board and to ensure that risk controls are more firmly embedded in the organisation. he Our supervision focuses on strengthening the lines of defence, and uses a risk-based approach. Data analysis plays an increasingly important role, t for example in updating the risk profiles of sectors and institutions. We plan to explore and expand our use of innovative technologies in the years ahead and to encourage the sector to use innovation as a means to achieving more effective and efficient ethical operational management. Equally important is that financial institutions must be alert to the risks of financial and economic crime inherent in the use of virtual currencies. Investigative authorities are increasingly encountering the use of virtual currencies in money laundering and terrorist financing.
Supervision Outlook for 2018 Below, we will describe the topics to which we plan Financial institutions are deemed to comply with 15 to devote specific attention in 2018. amended legislation and regulations from their effective date onwards, and we intend to examine Anticipating changes in legislation and compliance. We will inform the sector participants regulations of the exact timing and scope of our examinations in In the period ahead we will see a string of legislative due course. changes in the area of financial and economic crime and ethical operational management of financial Systematic integrity risk analysis (SIRA) in institutions. Examples of major changes include practice the implementation of the European Fourth Anti- A SIRA as performed by a financial institution forms Money Laundering Directive² into Dutch law and the basis for safeguarding its ethical operational the introduction of a revised statutory framework management and preventing its involvement in for trust offices. The amendments demand a great financial and economic crime. Institutions are deal of adaptability from the financial sector, expected to identify risks and to prepare policies and as well a proactive stance where implementation take adequate measures to control these risks. and compliance are concerned. We urge financial institutions to anticipate impending legislative Over the past years, we have devoted special changes and take adequate action to ensure that attention to the SIRAs of financial institutions they comply with the new requirements in time. across sectors. We examined their quality and provided guidance about their design and about We will keep institutions updated on new drawing up an integrity risk appetite. Our 2016 and developments and the envisaged effective dates 2017 examinations revealed that there is room for of relevant legislation through sector letters and improvement, and we took enforcement measures news releases. Where needed, we will host sector- against several institutions. Too often, we see specific and general information sessions. We will discrepancies between paper SIRAs and institutions' also organise meetings with the financial sector to day-to-day ethical operational management and their discuss the key changes facing the sector and our enactment of the gatekeeper role. expectations with regard to implementation. 2 Directive 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ 2015 L 141/73).
16 Hence, we will in 2018 closely scrutinise how We urge financial institutions continue developing institutions put the outcome of their SIRA into and to make a significant contribution to preventing practice in terms of the risk assessments that they terrorist financing and evasion of financial sanctions. make and the risk controls that they implement. In 2018, we will examine the following questions We intend to focus on the principal risks inherent in across the sector. the specific profiles of the institutions that we select, ▪ How do financial institutions respond to the risk and will work together with our FEC partners. of becoming involved in terrorist financing? ▪ Do they make adequate use of indicators to Our examination will cover all supervised sectors. identify terrorist financing and reporting this Based on risk profiles, we will, for each sector, where relevant?³ establish which risks and which financial institutions ▪ Are the risk controls aimed at ensuring will be included in the examination. We will review compliance with the Sanctions Act 1977 and documentation, such as the most recent SIRAs, related laws and regulations adequate? and perform on-site research to assess the actual effectiveness of the control framework. We will base our examinations on conclusions drawn on previous occasions. Terrorist financing and violation of sanction rules The current geopolitical conflicts and real threats of terrorism demand that the financial sector puts in a maximum effort to prevent involvement in terrorist financing and violations of the Sanctions Act 1977 (Sanctiewet 1977). Financial institutions are required to have an adequate transaction monitoring system in place that detects unusual transactions at an early stage and reports them where relevant. The examinations we performed over the past few years revealed significant shortcomings regarding the measures institutions take to control these risks and to ensure that they comply with the notification requirement. 3 We also refer you to our recently issued guidance document on effective transaction monitoring.
3 Banks 18 Exceptional monetary policy, low interest The impact of low interest rates rates and technological innovation all have Our supervision will continue to devote attention an impact the profitability of banks and to the low level of interest rates. In recent years, the sustainability of their business models. large Dutch banks have been coping well with Banks therefore need to be alert in order pressure on profits from low interest rates. to anticipate changes at an early stage. One of our examinations has shown that the In addition, the banking environment is scope for maintaining profitability is narrowing, changing, due to geopolitical developments, however, for example when mortgage loans with Brexit being a case in point. Although the comparatively high margins are being replaced by exact impact of Brexit on the banking new ones with lower margins. sector is still uncertain, the issue casts a long shadow: banks residing in the UK Introduction of PSD2 will impact the are already moving their operations to banking sector mainland Europe. The revised European Payment Services Directive (PSD2) aims to foster market innovation. It offers banks and other businesses the opportunity to European banking supervision implement technological innovations and to Within the SSM, the ECB has since 4 November 2014 market new products and services, such as account borne the ultimate responsibility for prudential information. The PSD2 will provide opportunities, supervision of all banks operating within the euro but also place stricter demands on businesses in area. The ECB and DNB jointly conduct supervision terms of security and authentication and regarding of significant institutions (SIs), whereas we conduct notifications of incidents in the payments system. our supervision of less significant institutions (LSIs) under the aegis of the ECB. The SSM's agenda Banks will therefore need to make operational determines prudential supervision of banks, changes before the PSD2 takes effect. We will including LSIs. The 2018 agenda is expected to be consider these new requirements as part of our published in December 2017, and we will notify the supervision of sound operational management and Dutch banking sector of its contents. Its focus areas business continuity management. will include sustainable profitability of business models, credit risks in concentrated portfolios and non-performing loans, risk management based on internal models, the SSM-wide stress test, and operational preparations for Brexit.
Supervision Outlook for 2018 Review of internal models Financial and economic crime 19 The SSM in 2017 launched a project named Targeted One of DNB's national tasks is to supervise the Review of Internal Models (TRIM), with the aim prevention of financial and economic crime and of harmonising supervision of internal models and to monitor ethical operational management on raising their quality. The projects involves on-site the part of banks. This specific remit is not part examinations at the selected institutions. Retail of our SSM responsibilities. We compile dedicated models are being reviewed, and the examination supervision programmes for each SI to enable will run into 2018. Corporate SME models will be them to comply with relevant laws and regulations. reviewed in the first half of 2018, and wholesale The programmes are tailored to the specific risk models will follow in the second half of 2018. We will profile of the SI. We plan to communicate the report the results to the individual institutions. supervision programmes to the SIs in early 2018. The TRIM project is expected to be completed in The main objectives of these programmes are late 2019. to hold management boards accountable for safeguarding sound operational management Credit risk and to urge them to strengthen their compliance Besides the TRIM project, the SSM also conducts function to control risks related to financial and credit risk assessments. Its 2017 assessment of the economic crime. Our supervision of LSIs in this area quality of SME loans extended by Dutch banks based will remain risk-based and intensive, both sector- on an Asset Quality Review (AQR) will continue into wide and institution-specific. 2018. The results will be announced in mid-2018. In addition, the SSM is expected to launch an examination into credit risks in shipping portfolios in late 2017. Stress tests for banks In 2018, the European Banking Authority (EBA) will again be conducting its two-yearly banking stress test for significant institutions. This exercise aims to tests the banks' resilience against adverse market conditions and to reveal potential problem areas and vulnerabilities. The outcome will be addressed in the Supervisory Review and Evaluation Process (SREP).
Supervision Outlook for 2018 4 Insurers Business models in the insurance sector in Many insurance firms have started future-proofing 21 the Netherlands have been under pressure their business models. Further and accelerated in recent years, reflecting the low interest strengthening of the capacity for change remains a rate environment, declining premium necessity to respond to new developments promptly. volumes, technological developments and As in other sectors, insurance firms are expected fierce competition in a partly saturated to make sure that their business models reflect the market. Fundamental choices must be impact of societal trends. Political, legal, social and made to safeguard a financially solid cultural trends, as well as the ageing population, insurance sector that continues to serve present new risks, change already insured risks, society. In December 2016, we issued a further the development of new products and report highlighting the key trends and services and can influence the way insurance firms main challenges facing the insurance work. Another issue meriting attention is climate sector, entitled "Vision for the future of change, which impacts both insurable risks and the Dutch insurance sector”.⁴ The report's investments made by insurers. analyses are still valid today. Accordingly, our insurance supervision will in 2018 focus on the importance of a robust financial position of the insurance sector, and consider whether insurers are sufficiently preparing themselves for the future. This will be part of our ongoing supervision and the specific examinations described below. In addition, due to potential claim risks related to unit-linked insurance policies, we will also continue monitoring that insurers carrying such insurance products are able to meet their commitments. 4 The report can be downloaded from our website: https://www.dnb.nl/en/binaries/Vision%20for%20the%20 future%20of%20the%20Dutch%20insurance%20sector_tcm47-350191.pdf?2017103114
22 The health insurance sector is also up against various We will continue our examination in 2018, homing challenges, such as demographic and political in on risk-mitigating actions that are needed to developments and medical innovations. We will issue safeguard that the sector will continue to respond a report outlining our vision of the health insurance appropriately to insurtech developments in the sector in late 2017. The report will address these medium and long term. We will urge insurers to set trends in more detail and present recommendations up their strategy, operations and organisation so as to health insurers, supervisory authorities and to deal responsibly with the opportunities and risks policymakers that help mitigate financial risks at that arise from insurtech, with a particular emphasis health care insurers. We will follow up on these on their capacity for change. We will inform the policy recommendations in 2018. insurance sector about the practical details of follow-up actions and time frames in our Dutch- Opportunities and risks of insurtech only insurance newsletter (Nieuwsbrief Verzekeren). Technological innovation in insurance, known as insurtech, is having a significant impact on the Insight into how to determine Net insurance sector. Future proofing business models Capital Generation fundamentally requires that insurers leverage the Net Capital Generation (NCG) is a key concept both opportunities that new technologies present. They for insurers and for market analysts. Insurers use could for example improve ease of use and customer it to describe movements in their capital position. focus, and initiate a transition towards more data- NCG can play a major role in an insurer's capital and driven organisations and more flexible and cost- dividend policy and in mergers and acquisitions. efficient operations. Understanding how NCG is determined and which We seeks to achieve that insurers deal responsibly uncertainties are at play can help both the insurance with the opportunities and risks that arise from firm and DNB get a clear picture of the former's insurtech. We launched an examination in 2017 future financial position. to develop a deeper understanding of the impact that technology has on insurers' strategies and We have found that insurance firms use different the future sustainability of their business models. definitions of NCG. In 2018, we will ask individual Our provisional findings suggest that insurtech insurance firms to submit data, in as far as we developments primarily complement current do not have this information yet, to improve our business models in the short term, whereas their understanding of the exact calculation methods impact could be more disruptive in the longer run. that they use. Based on this information, we will
Supervision Outlook for 2018 investigate whether prudential risks may arise from For selected life and funeral services insurers, we will 23 the way in which insurers address NCG in their examine whether experience mortality is estimated policies. We will study how exactly each company consistently and based on realistic assumptions, calculates NCG, which role it plays in each insurer's whether actual outcomes are reviewed, and how policy, how expectations and actual outcomes are significant uncertainties are. We will of course reconciled, and how uncertainties about the level inform the selected firms of our findings and will of NCG are addressed. We will inform the sector of also report back to the sector. our findings. The compliance function Insight into technical provisions and Compliance is a key function subject to statutory experience mortality requirements. An effective compliance function is With solvency levels of life and funeral services vital in controlling risks, such as those regarding insurers under pressure, it is more important than financial and economic crime and financial product ever to estimate technical provisions accurately. miss-selling. We performed an examination in After all, a deficit masked by technical provisions 2015 into the set-up of key functions, including may erode an insurer's solvency. Key elements in compliance. This revealed that positioning the technical provisions are the mortality table used and compliance function in relation to the management experience mortality. board, and formalising the compliance charter are key areas for attention. We intend to assess technical provisions more closely, and will place particular emphasis in 2018 on In 2018, we will be looking into the effectiveness of estimates of experience mortality. Our envisaged insurers' compliance functions and verify whether effect is that insurance firms correctly estimate they adequately addressed the concerns that experience mortality within the boundaries of emerged from our 2015 examination. To this end, inherent uncertainties, to the extent they do we will perform on-site examinations at five or six not already do so, and that they make sufficient selected insurance firms to verify whether they have allowance for such uncertainties. This will reduce embedded the compliance function in line with uncertainty as a proportion of technical provisions the statutory requirements and have implemented and, hence, any uncertainty surrounding the improvements. The AFM will be asked for input insurer's financial solidity. to draft the assessment framework and select the companies for examination. We will inform the sector of our findings.
5 Pension Funds 24 The financial position of many pension Pension funds are under great pressure to adapt funds remains vulnerable. While some to far-reaching changes and to address structural pension funds⁵ have seen their finances problems. The ambitions pension funds set improve, many cannot rule out the themselves and communicate to their members possibility of future benefit curtailments. must be sufficiently feasible and realistic. This This means expectations raised among requires from pension funds that their financial pension fund members may not be met. structure is sustainable in the long term. It is therefore vital that finances are put in order and expectations on the part of Pension funds are expected to be prepared for members are managed better. the future in terms of finances, operations and governance. Preparations are of the essence if a transition to a new pension system is to proceed smoothly. After all, that transition will be no less than a watershed in the pensions sector. Although it has not yet fully taken shape, the transition seems unavoidable, if only because the need for regeneration is increasingly felt. In their current form, pension contracts have major vulnerabilities, as they do insufficient justice to the differences in risk tolerance between generations and are incompatible with the increasingly flexible labour market. The examinations we have scheduled for 2018 place particular emphasis on bolstering the financial position of pension funds and anticipating future changes. We will also perform supervision activities aimed at identifying, describing and, where needed, mitigating specific risks, both sector-wide and for individual pension funds. 5 The same holds true for pension premium institutions. The text below is tailored specifically to pension funds.
Supervision Outlook for 2018 To provide clear information about our supervisory We will therefore examine decision-making and 25 activities, we send all pension funds their own documentation related to recovery plans, feasibility supervision schedule.⁶ This gives them an tests and possible benefit curtailments at selected individualised overview of the examinations and pension funds. Together with the AFM, we will review surveys they can expect from us in 2018. pension funds' communications with members and other stakeholders. We will inform them about the Well-balanced financial commitments exact time frames in early 2018. contribute to trust We want members' expectations to be met and Future orientation confidence to be maintained. Therefore it is The sweeping changes seen in the operating important for a pension fund's financial structure to environment of pension funds increase the urgency be well-balanced and sustainable in the long run. of long-term orientation. Moreover, Dutch law A vulnerable financial position presents an elevated requires that pension funds have a documented risk of curtailment of pension benefits and a reduced vision and strategy and that they identify and likelihood of indexation. This is why we will stress mitigate risks. One of the step changes ahead is two issues: pension funds must be critical of their the transition to a new pension system. Pension own financial structure, and they should ensure funds that fail to adapt to changing circumstances that their investment policies are well-balanced or do so insufficiently or belatedly could end up and sustainable in the long term, for both defined unable to meet their members' expectations and benefit and defined contribution schemes. losing their rationale. In doing so, we will follow up in 2018, jointly with the We therefore urge pension funds to make sure AFM, to the "clear expectations" theme we adopted their operations, organisation and governance are in 2017. Specifically, we will examine pension funds' agile and resilient to potential changes in their decision-making processes relating to their financial environment. They should focus on the long term structure. Examples include the choices they make and manage their strategic risks. This will allow in respect of sustainable and other investment them to create the conditions to keep serving their policies and the assumptions that underlie their members adequately, also in the future. recovery plans and feasibility tests in the event that contributions prove not recover costs. 6 With the exception of pension funds in the process of wind-up.
26 In 2016 and 2017 we examined whether pension Our aim is to achieve that pension funds and funds had a vision and strategy in place, whether pension administration organisations are adequately they implemented their strategy and whether they equipped to keep their pension accounts in a mitigated vulnerabilities and strategic risks. We will sound manner. Next year, we will complete follow up on these examinations in 2018, monitoring the survey launched in 2017 into outsourced how pension funds implement their strategies and accounting services among pension administration how they address vulnerabilities and risks. Where organisations. In addition, we will examine the needed, we will urge individual pension funds to quality of administration records and monitor take specific steps, by imposing a formal measure as improvements that individual pension funds make to the case may be. their information security. Marking the completion of both examinations into this subject, we will issue a Sound pension administration amid guidance document that provides pension funds with increasing digitisation practical tools for controlling operational and IT risks Having a robust digital administration system in in pension accounting. place is essential for pension funds. Using deficient or legacy systems carries the risk of information not being available to members in digital format or being insufficiently protected against IT risks such as identity fraud and cybercrime. We discussed this risk in the cross-sectoral section on technological innovation. Administration systems must also be sufficiently flexible to incorporate newly required functionalities. This is necessary as part of preparations for the transition to a new pension system, which will require adjustments to systems and the introduction of new applications. Examinations have shown, however, that many administration systems fail to meet today's demands.
Supervision Outlook for 2018 Ready for IORP II 27 In 2019, the revised European Directive on Institutions for Occupational Retirement Provisions (IORP II)⁷ will be implemented in Dutch law. The Directive contains more specific requirements as to the set-up of a risk management function and other key functions. For example, pension funds will be obliged to have an actuarial function and an internal audit function in place. Likewise, it also obliges institutions that pursue a sustainable investment policy to consider environmental, social and governance factors in their investment decisions. We aim to achieve that pension funds anticipate the requirements under impending legislative amendments and ensure compliance within the set deadline. We educate pension funds about the IORP II requirements and make enquiries from pension funds as to the current set-up and effectiveness of their key functions, notably their risk management function. We also consider the role that newly emerging climate-related risks play in their investment policies. We use the results from our enquiries to select pension funds for more in-depth on-site examinations and inform the sector about the results. 7 Directive 2016/2341/EC of the European Parliament and the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs) (OJ L 354/37);
Supervision Outlook for 2018 6 Investment Firms and Investment fund managers In 2018 our supervision of investment We are aware of the opportunities and risks 29 firms and investment fund managers will presented by consolidation in this sector. continue to focus on capital buffers and Consolidation may be driven by pressure on asset sound operational management. Although managers' business models, as well as by a wish to we have seen improvements, many firms benefit from economies of scale in small or medium- and funds still need to shore up their sized funds. capital buffers. Our ongoing supervision activities will concentrate in particular on We launched an examination in 2017 into the the Internal Capital Adequacy Assessment sustainability of business models of investment firms Process (ICAAP) in 2018. We will again and investment fund managers and also studied impose enforcement measures where we liquidity risks in open-ended investment funds and find capital deficits. risks inherent in outsourcing and IT. The various findings will be fleshed out and may result in additional examinations and measures in 2018. Developments in legislation and regulations We expect the European Commission to introduce legislative proposals for a new capital framework for investment firms in 2018. The proposed rules will be based on an opinion⁸ that the EBA issued on 29 September 2017. We have pressed for a suitable prudential capital framework, both within the EBA and in our consultations with the Ministry of Finance, one that does more justice to the specific risks faced by investment firms. Through our seminars, newsletters and dialogue with sector organisations, we will continue to keep in touch with the sector about the design of the new capital framework. 8 http://www.eba.europa.eu/-/eba-issues-opinion-on-the-design-of-a-new-prudential-framework-for- investment-firms
30 The revised Markets in Financial Instruments We aim to get a clearer view of whether pension Directive (MIFID II) is also scheduled to take effect asset managers are sufficiently future-proof to face in 2018. As a consequence, a number of firms will the developments ahead. To do so, we will chart require a licence as investment firms and become the impact that the current developments have on subject to AFM and DNB supervision⁹, such as pension asset managers, using findings from previous proprietary traders, which used to be exempt. We set examinations we conducted into the robustness and up a project organisation in 2017 to assess MiFID II change capacity of pension funds. We will address licence applications and related DNO requests and findings and further research questions in our regular to ensure a smooth application process. We expect management discussions with the boards of pension to remain engaged in activities relating to MiFID II asset managers and will inform the sector about the through the first half of 2018. results or our examination. Future orientation of pension asset managers The structure of the pensions sector is set to change within the next few years, as old-age provisioning will shift from collective pension provisions towards more individualised plans. This will affect pension funds and pension asset managers. The latter manage various types of schemes, and even more types are expected to be added in the future. Pension asset managers also operate in a competitive market, putting further pressure on their business models, and they should prepare for the impending changes. 9 https://www.afm.nl/en/professionals/onderwerpen/mifid-2/vergunningen-nieuw
Supervision Outlook for 2018 7 Payment and e-money institutions The market for payment services is need to apply for a licence. We are therefore 31 changing rapidly, which is one of the devoting a considerable amount of time and reasons why the European Payment effort to optimising the market access process Services Directive was revised in 2016 and incorporating new requirements into our and its successor, the PSD 2¹⁰, will come supervision. We will be proactive in informing the into force in 2018. This should help create existing payment institutions about the further an integrated European internal market requirements governing operational management for payment services and facilitate that ensue from the PSD2 and related national and open banking. European laws and regulations. Competition remains fierce in the payment The PSD2 will create two new categories of services market, weighing down on profit margins, payment services providers. Account information especially in the market for payment institutions. service providers will be able to access information We have recalibrated our supervision in response about a customer's current account, subject to the to the changes and expansion in the payment latter's consent. Payment initiation service providers services market, expanding our capacity over the will be allowed to initiate transactions involving a course of 2017 to make our supervision of payment current account, again subject to the customer's institutions more forward looking. More than consent. before, our supervision emphasises a systematic assessment of risks that payment institutions face The PSD2 will potentially have a significant impact and their practical control of these risks, for example on the Dutch financial sector and payment by means of their audit functions or IT-wise. system, and the supervision of both. Payment We started this effort in the second half of 2017 and service providers that currently hold a licence will finalise it in 2018. Similar to our supervision in must meet the PSD2's new requirements, while other sectors, our activities will feature more regular providers looking to offer the new services will consultations with the large payment institutions. 10 Directive 2015/2366 of the European Parliament and the Council of 25 November 2015 on payment services in the internal market amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010 and repealing Directive 2007/64/EC (OJ 2015 L337/35)
8 Money Transfer organisations 32 Money transfer organisations – essentially In 2018, we will concentrate on examining money transaction offices – have a unusual transaction patterns in money transfer high inherent risk profile where money organisations. Analysing the transaction data laundering and terrorist financing that money transfer organisations submit on a are concerned. These risks are also quarterly basis allows us to develop deeper insights acknowledged internationally: the into trends and unusual transaction patterns. European Commission qualifies We combine our analysis with other information money remittances as a high risk in its provided by the organisations, and the results supranational risk assessment. Money will serve as key input for more in-depth on-site transfer organisations need to make a examinations and interventions where needed. greater effort to prevent financial and economic crime. In the Netherlands, DNB supervises money transfer organisations, which include both offices licensed in the Netherlands and agents of foreign providers that offer their services in the Netherlands under European passporting rules. We also supervise these agents' compliance with legislation such as the Dutch Anti-Money Laundering and Anti-Terrorist Financing Act (Wet ter voorkoming van witwassen en financiering van terrorisme – Wwft). These activities are performed as part of our cross-sectoral priorities, notably examinations into prevention of financial and economic crime. In addition, we conduct ongoing supervision of this sector.
Supervision Outlook for 2018 9 Trust Offices We plan to step up our risk-based debated in the Lower House of Dutch Parliament 33 supervisory approach for the trust in 2018. Laws and supervision do not suffice, as it sector, which will be noticeable for will be up to the trust sector itself to take action. all trust offices. They will need to If trust offices believe they have a future in the prepare for the introduction of a new Netherlands, they will need to step up their efforts statutory framework, which is the Act both individually and collectively. on the Supervision of Trust Offices 2018 (Wet toezicht trustkantoren 2018 – Wtt Besides our institution-specific supervision efforts, 2018). Similarly, revamped international we perform our activities relating to trust offices tax rules and regimes could have a in line with our cross-sectoral priorities, notably significant impact on the structures that examinations into prevention of financial and trust offices create for their customers. economic crime. We will in 2018 devote particular Trust offices that fail to meet the stricter attention to terrorist financing and violations of the requirements because they are unable or Sanctions Act 1977. unwilling to boost their professionalism will gradually disappear, either of their In 2017, we added questions about the risk control own accord of as a result of enforcement framework to our recurring requests for information measures. to fine-tune our understanding of trust offices' risk profiles. We will use the obtained information in our examination themed "Systematic integrity In 2017, the trust sector came under even closer risk analysis in practice". We will also decidedly talk scrutiny than before. Prompted directly by to the sector in 2018 about prompt and adequate the Panama Papers, the Parliamentary Inquiry implementation of the Wtt 2018 requirements in Committee for Tax Structures (POFC) heard their organistations. experts and witnesses, including DNB. We voiced our concern to the POFC because we feel too We will again work closely with our partners in many issues remain unaddressed in spite of our the FEC in 2018. Likewise, we will maintain an considerable supervisory efforts. We advocated open dialogue with sector representatives. Sector wider powers with respect to withdrawing licences association Holland Quaestor has informed us that and other supervisory interventions. The Wtt 2018 it is engaged in a fundamental overhaul of its quality proposes to bolster the statutory framework hallmark system, which we welcome. governing trust offices and is expected to be
Supervision Outlook for 2018 10 Supervision in the Caribbean Netherlands DNB is responsible for supervising insurers, money transaction offices and trust offices, 35 financial institutions in the Caribbean homing in on risks related to money laundering, Netherlands.¹¹ For our supervision to be financing of terrorism, violation of sanctions of high quality, notably our prudential legislation and corruption (bribery and conflicts of supervision of branch offices, we depend interests). A second focal point in our supervision on the proper functioning and ethical will be these institutions' adequate transaction operations of Centrale Bank van Curaçao monitoring, and we will stress their notification duty en Sint Maarten. This is an area of in this respect. ongoing concern. Meanwhile, we perform our supervisory tasks in the Caribbean Collaboration with Financial Netherlands as well as possible, given our Intelligence Units (FIUs) practical and statutory constraints. To be able to meet their notification duty, We remain alert to pointers of potential financial institutions need an effective transaction prudential problems at financial monitoring process. Examples of major risk areas institutions operating in the Caribbean in the Caribbean Netherlands are the laundering Netherlands and ensure that their of money originating from Venezuela, investing operational management is ethical and funds of unclear origin in Bonaire-based real they make an effort to prevent becoming estate, and evading taxes through the services involved in financial and economic crime. of companies and trust offices based in Panama. We will continue our close collaboration with FIU NL and FIUs in the other countries within Ethical operational management the Kingdom of the Netherlands in 2018, focusing As part of our supervision of ethical operational mainly on the financial institutions' notification management, we emphasise that financial duty. This collaboration will produce joint structural institutions must identify and analyse risks and analyses of relevant integrity risks, joint information subsequently implement adequate risk controls. provision to the sectors and, where possible, joint We will stress this in our examinations of banks, enforcement measures. 11 The Caribbean Netherlands consist of Bonaire, St Eustatius and Saba, also commonly referred to as the BES islands. More information about our supervision in the Caribbean Netherlands can be found on http://www. cn.dnb.nl/en.
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