The AFM’s priorities in 2023
The AFM published its agenda for 2023 on 12 January 2023. The agenda describes trends and risks in the financial sector and explains the priorities and activities for the AFM for the coming year. These priorities stem from the updated AFM Strategy 2023-2026, which has also been published. Below we will discuss some interesting points from both the AFM’s multi-year strategy, and the concrete agenda for the coming (supervisory) year. Here we will focus on:
- Financial service providers (advisors, brokers and authorised agents);
- the capital markets; and
- the asset management industry.
Financial service providers
The AFM indicates that the industry has taken important steps in recent years to make the interests of the customer more central. The AFM considers it important that the sector offers good financial products to the right target group in a careful manner. The sector is therefore already reasonably accustomed to product governance. It is also important that customers are helped with appropriate advice when making complex choices. There must be ongoing attention to the customer, even after the financial product or service has been concluded. In the coming years, the AFM will continue to devote much of its capacity to this basic idea.
Regarding digitisation, the AFM indicates that it is up to financial service providers to manage the risks of digitisation, and to ensure that customer interests remain central. Responsibly handling the collection of customer data and artificial intelligence (AI) requires controlled operations and adequate risk management. To properly supervise a digital sector, the AFM must also improve its own data position. The AFM noted in its Market Impressions 2022 document that large(er) financial undertakings must prepare for new legislation around digital security to protect themselves and customers. These obligations are imposed in the Digital Operational Resilience Act (DORA). Although DORA only applies to larger undertakings with more than 250 FTEs, the AFM believes that DORA can also serve as a framework for the (proportional) design of ICT controls of smaller and therefore all undertakings.
In the area of sustainability, the AFM sees potential risks in poor sustainability transparency, greenwashing, uninsurability and the depreciation of stranded assets. The AFM wants the industry to continue to put the customer’s interests first with respect to sustainability. In the coming years, the AFM will move from guidance to enforcement in its supervision where appropriate.
The AFM wants to achieve the following by 2023 with its supervision of financial services, among other things:
- Financial service providers prevent over crediting, especially in light of rising interest rates and inflation.
- The risk of un(der)insurance must be reduced.
- Service providers should not lose sight of their duty of care, even after a product is closed (aftercare);
- Digitalisation is deployed in the interest of the customer. This means making services more accessible without losing sight of safeguards for the customer’s interests (including execution only). The guidance provided by apps and websites, the use of customer data and online marketing, the product range and the personalisation of insurance premiums contribute to customer welfare;
- Financial service providers are complying with new sustainability legislation that went into effect in January. This counteracts the risk of greenwashing and helps consumers make informed choices when fulfilling their sustainability needs.
In the Agenda 2023, the AFM indicates that it will focus, among other things, on neo-brokers operating in the Netherlands. The aim is to investigate whether the neo-brokers put the customer’s interests first when distributing and selling investment products.
The AFM will also investigate how supervision of Buy Noy Pay Later providers should be structured. In the area of sustainability, the AFM will conduct an initial investigation into how advisors and asset managers solicit the sustainability preferences of the client base. Incidentally, in answers to Parliamentary questions on BNPL, the Minister of Poverty, Participation and Pensions expressed in very firm terms on January 24 the need for (self-)regulation of that payment option, especially where it is offered to young people.
The AFM’s role as a regulator has become more important, partly because of Brexit. In the coming years, the AFM will give priority to tackling cross-platform market abuse. This requires market participants to further improve the quality of the data they are required to provide.
The AFM also sees that operational risks have increased given the central role of IT processes within the companies that operate the financial systems. In the AFM’s view, the laws and regulations are not yet sufficiently adapted to this. DORA, IFR and IFD give the AFM more opportunities to address the risks surrounding the controlled and sound conduct of business, including in the areas of outsourcing and ensuring cybersecurity. In the coming years, the AFM will pay additional attention to monitoring the operational reliability and controlled operations of institutions with market relevance.
The AFM has, among other things, the following targets for the year 2023 regarding its supervision of capital markets:
- Parties improve compliance with their transaction reporting and disclosure obligations;
- The supply chain remains reliable and robust, even within the current (geopolitical) developments in the market and with the advent of new technologies;
- The market is prepared for new laws and regulations, such as DORA, IFR/IFD, and sustainability regulations;
- Institutions provide investors with timely and accurate information, including non-financial and ESG information.
By collaborating with fellow regulators and conducting supervisory research, the AFM is seeking to increase its knowledge in the coming year in the areas of cross-platform market abuse, algorithmic trading and machine learning. The AFM will also launch thematic investigations of proprietary account traders, trading platforms and post-trade parties, including in the areas of information security, algorithmic trading, remuneration policies or organisational culture.
For the supervision of prospectuses, the AFM emphasizes sustainable financial products. The AFM wants to prevent issuers and financial market participants from presenting themselves and/or their financial products as “green” when in reality they are not. The AFM will also investigate ESG benchmarks and the transparency of new financial products, such as Green bonds and Sustainability linked bonds.
In the coming years, a number of developments will impact the industry and the way the AFM supervises the industry. New regulations place higher demands on business operations, including in the areas of sustainability and digital resilience. Also, the increasing outsourcing of business activities demands more from business operations. However, outsourcing activities should never lead to losing control and oversight.
Changing market conditions are also affecting the sector. For example, the AFM sees consolidation in the sector, increasing investments in illiquid investments, technological developments and cybercrime, and attention to money laundering and terrorist financing. The AFM also points to the pension transition and sustainability transition that are demanding much from the sector.
By 2023, the AFM wants to have achieved the following in its supervision:
- Fund managers have a sound operational management in place;
- Fund managers have a grip on the entire chain while outsourcing activities;
- The sector is timely prepared for the transition to the new pension system;
- Monitoring compliance with new sustainability rules ensures the continued transition to a sustainable financial sector;
- The sector is prepared for new laws and regulations, such as DORA and the recently introduced IFR/IFD rules; and
- The sector has mastered the effects of digitisation and the use of new technologies.
The AFM announced in its agenda that it will conduct thematic investigations into the integrity and controlled operations aspects of the sector, for example, internal and external outsourcing of services. Specific attention will be paid to the outsourcing of services within (international) groups.
Also in the asset management industry the AFM is going to monitor compliance with the SFDR and is committed to countering greenwashing, and the AFM is going to prepare itself (and the industry) for new regulations such as DORA and MiCAR by, for example, preparing guidelines.
How can market participants anticipate this?
The 2023-2026 multi-year strategy provides a good picture of the topics on which the AFM will focus its attention in the coming year (and years to come). This therefore means for market participants that they too must be extra aware of the need for compliance with respect to these topics. That compliance starts with knowledge. What exactly is expected of me? This is relevant not only for the compliance officer, but also for the management board and the supervisory board. Awareness and knowledge must be present in everybody within the organisation in a proportionate way. To do’s are therefore:
- Use the AFM multi-year strategy and agenda to set the compliance agenda for 2023;
- Verify that appropriate knowledge and awareness is present within the organisation on the relevant topics. Organise update sessions tailored to the target audience. A risk and compliance department needs more detail than directors and commissioners;
- Check and update policies, procedures and measures.
Do you need help mapping out the rules for your organisation? Would it be helpful if directors and/or supervisory directors were brought up to speed on the most important developments in a (non)executives training? Would you like assistance with drafting policy? Please contact one of our experts.