Market conduct under microscope
Under the renewed Dutch pension law, one of the new tasks of the Netherlands Authority for the Financial Markets (AFM) will be the supervision of the quality of information pension funds provide their members and pensioners with a second supervisor for the funds. Within the pensions industry this announcement caused some concerns. Are these concerns justified or is it merely a case of cold feet?
Gerald Santing, managing director at AFM, and Jan van Miltenburg, responsible for the preparation of this new supervisory task at AFM, fully understand the hesitation which still exists within the pension world. “The sector isn’t yet familiar with the new system. Banks and asset managers showed the same doubts at the beginning, but they learned how to deal with our so-called ‘twin peaks’ supervision model and discovered the advantages. We hardly face any difficulties,” says Santing.
It is therefore a good moment to place AFM - hitherto unknown and unloved - in the spotlight.
AFM has been responsible for supervising the operation of the financial markets since March 2002. In the Netherlands, the system of supervision was overhauled in 2002, from sector-based to function-based. The former STE (Securities Board of the Netherlands) has been succeeded by the AFM with a new role: the supervision of the conduct of and the provision of information by all parties on the financial markets in the Netherlands, specifically on the savings, lending, investment and insurance markets.
This has resulted in a large number of new tasks for the AFM, some of which have already been implemented, and others, such as the supervision of communication of pension funds, are planned over the coming months or years. AFM aims to make a contribution to the efficient operation of these markets.
The Dutch central bank (De Nederlandsche Bank), which now includes the PVK, the former pensions regulator, is responsible for prudential supervision. Prudential supervision addresses the question of whether participants in the financial markets can rely on their contracting parties being able to meet their financial obligations.
AFM is responsible for the supervision of market conduct. This supervision focuses on the question of whether the participants in the financial markets are dealt with properly and whether accurate information is properly disclosed to them.
This division between prudential and market conduct supervision is sometimes described as the twin peaks model. “We have an excellent cooperation with DNB, “ says Santing. “We have set up a covenant in which is set down how we should work together, and especially how we should avoid double supervision. To offer the various parties the possibility to express their complaints anonymously, we installed an independent complaints desk. But up till now it only received one report. I hope this can comfort the pension funds somewhat.
“I can understand the reticence of the funds regarding two supervisory bodies, but it is the legislator who decides how exactly the supervision is organised. It is our challenge to carry out our tasks in a constructive and stimulating way. And as far as I am concerned, in close cooperation with the pension sector itself. The new pension law is still in a draft-phase and has recently been sent to parliament.”
AFM is now engaged in studying the details concerning pensions communication in the new law, Van Miltenburg says. “In doing that we have fruitful discussions with the branch organisations and also with a growing number of funds. We are convinced that there is a lot of knowledge and experience with effective communication within the sector and it would be stupid to ignore that.
“On the other hand there is enough room for improvement, and that is where our supervisory task should focus on. Stimulating improvements. Information should be correct, sufficient, accessible, complete and consistent.”
The aim of AFM, in accordance with its articles of association, is to “promote an orderly and transparent market process on the financial markets, the integrity of relations between market players and the protection of the consumer.’ This aim is translated into three objectives, which serve as a guideline in the day-to-day work of AFM:
q To promote access to the
q To promote the efficient, fair and orderly operation of the financial markets;
q To enhance confidence in the financial markets.
Although pension funds operate in a financial market, a pension scheme in itself is not by definition a financial product, says Santing. “It is the result of negotiations between social partners concerning conditions of employment. As such this second pillar product differs fundamentally from third pillar individual pension products. Our focus will be on what realistic promises can a fund make towards its members, for instance in terms of indexation. And, is the available information clear enough to be useful? Is the information enough tailor-made for the various generations?
“Despite the difficult past three years in terms of revenues, pension funds can still count on a lot of trust. And to be frank, in my opinion the pension sector has a high level of integrity.”
Van Miltenburg adds: “A good example of the sector taking its own responsibility is the recent launch of a harmonised annual pension statement. It was an initiative from within the sector and many funds worked close together with the branch-organisations and the Dutch consumers’ association to achieve this client-oriented result. That’s why we think that our supervision should encourage further self-regulation.”
Santing expresses his faith that AFM will be able to gain the trust of the pension funds. “We are independent from the ministries. In fact the funds pay our bill. That creates obligations, at least that is how we feel it. And it explains why we are dedicated to cost-effectiveness. Our costs of current operations show a relative decrease, although our size increases. But I want to underline that our growth is purely linked to new tasks.”
AFM carries out its supervisory role by checking, enforcing and transferring standards and acts specifically on tip-offs from the market and the findings of its own control organisation. AFM also formulates, enforces and applies policy and regulations in the field of the financial markets. And it advises the ministry of finance on the drawing up of new legislation and regulations. Consultation of professionals, as said before, is an important instrument in this process. The supervisor’s guiding principles are integrity, transparency, adequate information and equality
AFM is authorised to supervise all Dutch securities exchanges and institutions that offer securities services in or from the Netherlands; all Dutch credit institutions that offer consumer credit; the provision of Financial Information Leaflets by banks, investment institutions, credit providers, pension funds, insurance companies and securities institutions.
AFM is an independent body. The competences concerning the supervision of conduct of financial markets have been delegated to the AFM by the ministry of finance. AFM bears the independent responsibility for the execution of its supervision. A supervisory board ensures that the tasks of the executive board of AFM, chaired by Arthur Docters van Leeuwen, are carried out properly. The minister of finance appoints the members of both the supervisory and executive board, and approves amendments to the bylaws and the yearly budget.
Alfred Kool is managing partner, Kool Corporate Communication and former director corporate communication at PGGM