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Supervision Outlook 2018
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 effectsSupervision 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.
nieuwing10 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
duurzaamheid12 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.jspSupervision 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).20
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?201710311422 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 willSupervision 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);28
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-firms30 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-nieuwSupervision 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 be34
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.You can also read
