Amendment to the AFM/DNB Policy Rule on Suitability 2012

In the Netherlands, the manner in which the suitability requirement should be interpreted is not set out in legislation, but in a joint Policy Rule of the AFM and DNB. The Policy Rule contains the assessment criteria that these regulators use to determine whether the suitability requirement has been met. The Policy Rule also clarifies what information and credentials the regulator needs for the assessment.

The Policy Rule has been amended in response to changes in European and Dutch laws and regulations. The regulators have furthermore incorporated experiences from supervisory practice in the amended Policy Rule. The Policy Rule and the explanatory notes have also been updated and clarified on a number of points, and a number of omissions have been rectified.

We will briefly highlight the most important changes below.

Competences

The Policy Rule states that suitability consists of knowledge, skills and professional conduct. According to the Policy Rule, this is demonstrated by education, experience, competences and ongoing professional conduct. The suitability assessment must demonstrate suitability of a policymaker in the following five areas: (a) management, organisation and communication; (b) products, services and markets in which the financial undertaking operates; (c) sound and ethical operational management; (d) balanced and consistent decision-making; and (e) sufficient time available for the position on the part of the policymaker.

An annex to the Policy Rule contains a list of competences, such as authenticity, decisiveness, communication skills, and helicopter view and judgement, which, in any event according to the explanatory notes, should be assessed in conjunction with each other. The competences in the annex have been reviewed by the AFM and DNB and have been tightened, updated, added or omitted, where necessary. The following new competences have been added to the list: adaptive capacity, learning capacity, organisational sensitivity and judgement.

• The 'adaptive capacity' competence refers to a policymaker’s ability to react in a timely and adequate manner to foreseen and unforeseen changes, and to translate these into adjustments in the financial undertaking. It is important in this regard that the policymaker is able to adapt the leadership style to the situation at hand.
• The 'learning ability' competence refers to the ability to absorb new information and then apply it effectively for the organisation or in the policymaker’s own performance. It also involves applying the knowledge available and the ability to reflect on and willingness to learn from mistakes made.
• The 'organisational sensitivity' competence implies that the policymaker has an eye for developments, power relationships and sensitivities within the organisation. In doing so, the policymaker must also have an eye for the interests of internal stakeholders and use this information effectively.
• The last new competence is 'judgement'. This competence relates to the ability to weigh up data, interests and possible courses of action, and to arrive at a logical, realistic and reasoned judgement, conclusion or advice. The competence also refers to researching, recognising and understanding the essential elements and issues.

Interestingly, the 'loyalty' and 'negotiation skills' competences have been removed from the Policy Rule. No mention is made of this change in the explanatory notes (and in the feedback statement to the Policy Rule). The descriptions of 'loyalty' and 'negotiation skill' may have been incorporated into tightened descriptions of other competences.

The list of competences is neither exhaustive nor cumulative. This means that regulators may also include in the suitability assessment competences other than those listed in the annex. The new definition of 'competence' in the amended Policy Rule may be relevant in this regard. The new definition of competence reads 'skills, qualities and attitudes'.

Governance, organisation and communication

One of the subjects in respect of which a policymaker must demonstrate suitability is 'Governance, organisation and communication'. The description of this subject has been tightened in the amended Policy Rule by explicitly stating that policymakers are expected to have an overview of, and provide guidance on, long-term value creation. According to the regulators, merely having a vision of long-term value creation does not suffice, however: policymakers must give specific direction to it. The addition is in line with the requested 'change capacity' of policymakers, which is needed to cope with the challenges of climate risks and sustainability, among other things. This is also reflected in the Corporate Governance Code, which was recently updated.

Collective

The Policy Rule prescribes that the suitability assessment should also take into account the position of the policymaker, and the nature, size, complexity and risk profile of the financial undertaking. In the case of a collective, the suitability is not only assessed at the individual level, but also takes the composition and functioning of the collective into account. The definition of 'collective' has been supplemented in the amended Policy Rule, which demonstrates that the term 'collective' refers not only to day-to-day and other policymakers and co-policymakers, but also to members of the supervisory board.

Changes to groups A, B and C in the Policy Rule

The Policy Rule divides the various types of financial undertakings into three groups: A, B and C. This classification serves to ensure that the suitability assessment of policymakers is applied proportionately. The larger and more complex financial undertakings, such as banks, most insurers, and pension funds, are included in group A. Policy-makers of financial undertakings in group A are subject to a more extensive (risk-based) suitability assessment than policy-makers of financial undertakings in groups B and C. Policy-makers of financial undertakings in groups B and C are assessed on the basis of specific (rule-based) criteria. A number of changes have taken place in the group classification of financial undertakings.

Trust offices

Trust offices have been moved from group C to group A in the amended Policy Rule. This means that the suitability of new policymakers at trust offices will now be assessed more extensively. This allows DNB to make more targeted (risk-based) assessments instead of having to apply specific (rule-based) standards when making the assessment.

Crowdfunding service providers

In connection with the entry into force of the Crowdfunding Regulation[2], the AFM assesses whether policymakers of crowdfunding service providers are fit for duty. The scope of the Policy Rule has been adjusted in this light. Crowdfunding service providers are included in group B in the Policy Rule. This means that policymakers of crowdfunding service providers must demonstrate that they possess at least managerial and leadership skills, general and specific professional knowledge, and suitability with regard to sound and ethical operational management. Those skills and that knowledge and suitability must have been gained over a period at least two years’ work experience, at least one of which was a continuous period.

Investment holding companies

Management board members of an investment holding company and, if any, supervisory board members, are subject to a suitability requirement under the IFD[3]. The scope of the amended Policy Rule has therefore been extended to include suitability assessments by the AFM under the IFD. In line with the assessment regime for investment firms, investment holding companies have been added to group B in the Policy Rule. This means that policymakers of investment holding companies must demonstrate at least managerial and leadership skills, general and specific professional knowledge, and suitability with regard to sound and ethical operational management. Those skills and that knowledge and suitability must have been gained over a period of at least two years’ work experience, at least of which was a continuous period.

Authorised agents/sub-agents

Authorised agents/sub-agents have been moved from group C to group B. This means that they will now be assessed for suitability with regard to sound and ethical operational management. This is in addition to the existing assessment based on managerial and leadership skills, and general and specific professional knowledge. The change does not affect policymakers whose suitability has already been established.

Social entrepreneurship fund managers and venture capital fund managers

The EuVECA Regulation[4] and the EuSEF Regulation[5] have also led to an expansion of the scope of the Policy Rule. Policymakers of managers of venture capital funds[6] and social entrepreneurship funds[7] have been assessed for suitability by the AFM since these regulations became applicable. These funds are included in group B. The policymakers of the venture capital funds and social entrepreneurship funds will be assessed for general professional knowledge and specific professional knowledge gained during at least two years’ work experience.

General professional knowledge and specific professional knowledge

The amended Policy Rule clarifies for policymakers of group B financial undertakings that general professional knowledge and specific professional knowledge are substantively different, and both must be demonstrated. General professional knowledge must be demonstrated by each member of the collective. Specific professional knowledge must be ensured within the collective, with each member demonstrating either specific professional knowledge or knowledge of business operations.

'Small' financial undertakings– investment fund managers, managers of a UCITS, investment company, investment firm other than a tied agent, depositary, custodian of a UCITS, crowdfunding service provider, data reporting service provider, UCITS, or an authorised agent/sub-agent

The Policy Rule offers small financial undertakings in group B, employing up to six persons, including the management, the possibility of demonstrating the suitability of policymakers with more limited experience if, given the nature, size and complexity of the financial undertaking concerned, the required two years' work experience is not reasonably required. In that case, having management experience, general and specific professional knowledge and knowledge of business operations is sufficient if one year of continuous work experience has been gained. Managerial experience is not assessed in that case. The amended Policy Rule does not include (or no longer includes) this possibility for policymakers of credit providers, investment holding companies and pension depositaries. These policymakers will be assessed against the regular suitability requirements.

Incidentally, policy-makers of those financial undertakings for which this option does exist will be reassessed when the financial undertaking grows to employ more than six persons.

'Small' advisers, intermediaries or reinsurance brokers

The suitability requirements for a policymaker of an adviser, intermediary or reinsurance broker in group C employing up to six persons, including the management, have been extended. In addition to a degree from a university of applied science or higher in a field that is relevant to the financial undertaking, these policymakers must now have at least one year of relevant work experience in financial services gained in the past ten years.

In addition, a policymaker of a 'small' adviser, intermediary or reinsurance broker can demonstrate his or her suitability if he or she has seven years of work experience in a work environment relevant to the financial undertaking, with two years, one of which must have been continuous, of this relevant work experience being gained in the past ten years. This threshold has been lowered from the previous version of the Policy Rule. Once it is clear that the financial undertaking has grown, the policy holders of these financial undertaking will be reassessed.

The Policy Rule also clarifiesthat a suitability assessment of a policymaker of a small adviser, intermediary or reinsurance broker will not be carried out taking into account the composition and functioning of the collective.

Again, if the financial undertaking in question grows into a financial undertaking employing more than six persons, its policymakers will be reassessed.

Explanatory notes to the Policy Rule

As the explanatory notes to the Policy Rule are in practice an important part of the Policy Rule for financial undertakings, policymakers, co-policymakers and supervisory board members when preparing an application for a suitability assessment or a reassessment interview with the regulator, not only the Policy Rule has been amended, but also the explanatory notes to the Policy Rule have been amended or updated, and published in full.

Diversity

For example, the notes include an addition on diversity in the collective as a result of specific requirements under European and national laws and regulations to increase gender diversity at the top of large and listed companies.

Dutch companies listed on Euronext Amsterdam (both public and private limited companies) are subject to a diversity quota for the supervisory board of at least one-third male and one-third female. Large non-listed companies must also increase diversity at the top by setting targets and preparing a plan of action to achieve them. Furthermore, large companies are required to report on the existing male/female distribution, the targets, the plan of action and the goals achieved. The explanatory notes also state that the revised EBA/ESMA guidelines for assessing the suitability of members of the management body and key employees have strengthened diversity requirements. In addition, the notes refer to ESMA guidelines on the management body of market operators and data reporting service providers. These guidelines also contain concrete objectives in terms of diversity.

Regulators encourage diversity in the collective of policymakers. Differences in knowledge, experience, age, gender and professional and geographical background should ensure a broader view and different perspectives.

Conclusion

The amended Policy Rule on Suitability does not lead to major changes in the way the suitability assessment of management board and supervisory board members is conducted in the Netherlands. The amendments to the Policy Rules do result in the assessment criteria for policymakers of certain financial undertakings being changed or tightened.

 

[1] Under the Financial Supervision Act (Wet financieel toezicht), Trust Offices Supervision Act 2018 (Wet toezicht trustkantoren 2018), Money Laundering and Terrorist Financing Prevention Act (Wet ter voorkoming van witwassen en financieren van terrorisme), Pensions Act (Pensioenwet), Crowdfunding Regulation, EuVECA Regulation and EuSEF Regulation. Directors and supervisory directors must also be assessed for integrity.

[2] Regulation (EU) 2020/1503 on European crowdfunding service providers.

[3] Directive (EU) 2019/2034 on the prudential supervision of investment firms.

[4] Regulation (EU) No 345/2014 on European Venture Capital Funds (EuVECA Regulation). The regulation allows certain managers to register as venture capital funds, provided the managed investment vehicle complies with the rules set out in the regulation on the minimum amount to be invested in specified assets.

[5] Regulation (EU) No 346/2013 on European Social Entrepreneurship Funds (EuSEF Regulation). The regulation allows certain managers to register as social entrepreneurship funds, provided the managed investment vehicle complies with the rules set out in the regulation on the minimum amount to be invested in specified assets.

[6] As referred to in Article 3, opening words and (b), of the EuVECA regulation.

[7] As referred to in Article 3, opening words and (b), of the EuSEF regulation.