Financial Regulatory – Update Q1 2021

Brexit

On 24 December 2020, the EU and the UK reached an agreement regarding Brexit. This agreement sets out the rules that apply between the EU and UK as of 1 January 2021. The Dutch government recently published a document on Brexit readiness, covering subjects such as citizenship, healthcare, border control, logistics and transport, security and data, market access and trade, financial markets, energy, fishing, and international cooperation in legal proceedings.

From 1 January, EU financial institutions lost the possibility to passport their services into the UK, and vice versa. This means that British financial institutions will need to apply for a licence in an EU member state if they want to be active in the EU. This does not apply to three UK central counterparties (“CCPs”), which the European Securities and Markets Authority (“ESMA”) has recognised as third-country CCPs.

On 4 January 2021, ESMA published two memoranda of understanding concerning consultation, cooperation, and exchange of information between EEA competent authorities, ESMA and the UK Financial Conduct Authority. The memoranda provide a framework for the cooperation between the EU authorities and ESMA, and the FCA.  

On 13 January 2021, ESMA published a statement reminding investment firms to comply with rules on reverse solicitation in the context of the end of the transition period. ESMA reminds firms that every means of communication which is used, such as press releases, internet advertising, brochures, phone calls or face-to-face meetings, should be considered to determine if the client or potential client has been subject to any solicitation, promotion or advertising in the Union in relation to the firm’s investment services, activities, or financial instruments.  

Sustainable Finance Disclosure Regulation

The Sustainable Finance Disclosure Regulation (“SFDR”) will enter into force on 10 March 2021. The Regulation lays down harmonised rules concerning transparency on environmental, social, and governance aspects (“ESG”) of financial products for different types of financial institutions. For detailed information on the new disclosure obligations under the SFDR, we refer you to our e-book.

Implementation of the Fifth Capital Requirements Directive

On 29 December 2020, the Dutch Capital Requirements Implementation Act 2020 entered into force. This Act implements Directive 2019/878/EU (“CRD V”) and contains amended rules on capital requirements that apply to banks and certain investment firms. CRD V also contains several amendments to the rules on remuneration of employees of banks and investment firms.

For additional information on the CRD V remuneration rules amendments, we refer to our e-book (in Dutch) of 27 November 2020 on this topic We note that the European Commission has not yet published the RTS on identified staff.

ESMA proposes improvements to Transparency Directive

Following the Wirecard case, ESMA writes in its letter (dated 26 February 2021) to the European Commission of its proposals to improve the Transparency Directive. ESMA suggests improving the Transparency Directive (2004/109/EC, as amended by Directive 2013/50/EU)) to meet four aims:

• Enhance cooperation between authorities across the EU;
• Enhance coordination and governance on a national level;
• Strengthen independence of the national competent authorities; and
• Strengthen harmonised supervision of information across the EU.

In the letter, ESMA provides several suggestions for amendments of certain articles of the Transparency Directive.

Developments relating to anti-money laundering and anti-terrorism financing

Our previous newsletters (see here and here) summarised the specific Dutch plans regarding anti-money laundering and anti-terrorism financing regulations (the Wet plan van aanpak witwassen). A legislative proposal is expected in the first quarter of 2021. We also refer to a debate in the Dutch Parliament on this topic that took place on 10 December 2020.

Additionally, the newly incorporated entity Transaction Monitoring Netherlands (“TMNL”) is ready to start monitoring (business) transactions of five participating banks: ING, ABN AMRO, Rabobank, Triodos and Volksbank. TMNL aims to start monitoring retail transactions as of 1 January 2022. This joint initiative of these participating banks is in addition to the banks’ individual transaction monitoring activities.

Furthermore, on 15 February 2021, DNB published its new guidance on AML (dated December 2020) and the EBA published an Opinion (3 March 2021) on the risks of money laundering and terrorist financing affecting the European Union's financial sector and its revised Guidelines on money laundering and terrorist financing risk factors (1 March 2021).

DNB Supervision Strategy 2021 – 2024 and new policy on penalty amounts

The Dutch Central Bank (De Nederlandsche Bank – “DNB”) recently put out its Supervisory Strategy 2021-2024. DNB’s strategy consists of three pillars:

• DNB prioritises digitalisation and wants to respond to technological innovations. DNB considers that the increased use of data will lead to new opportunities, but also new risks.
• Sustainability warrants additional attention. Management of sustainability risks will be a major topic for financial institutions in the coming years. Therefore, it will also play an important role in DNB’s supervisory function.
• Continued focus on combatting financial crime. DNB considers that financial institutions have improved their role in the fight against financial crime, but finds that there is room for further improvement.

Furthermore, DNB published its policy on penalty amounts (Algemeen boetetoemetingsbeleid) on 11 December 2020. This document explains how DNB calculates the amounts of fines it issues. DNB must generally comply with this policy when determining the amount of a fine. The policy does not however set out in which cases DNB will impose a fine.

AFM Trend Monitor and Agenda

The AFM has published its Trend Monitor and Agenda for 2021. In its Trend Monitor, the AFM points out several trends it expects to play an important role in 2021:

• The corona crisis and Brexit will pose major risks to the stability of financial markets.
• Digitisation of the financial sector will continue to be an important trend; in particular, the use of AI technology will lead to new earnings models.
• The transition to a sustainable economy and society.

Regarding supervision priorities for 2021, the AFM will focus on the following:

• Protection of consumers in vulnerable situations by specifically focusing on the duty of care obligations (zorgplicht) of investment firms and financial advisers, and reviewing various financial products that are available on the market, including Product Approval & Review Processes.
• Maintaining a robust infrastructure and ethical trading on the capital markets.
• Ensuring asset managers have a sustainable business model and treat their clients with due care.
• Sustainability and implementation of the SFDR by financial institutions.
• Combating money laundering and other financial and economic crime.

DNB newsletter – developments in the trust sector

On 1 February 2021, DNB published its periodical newsletter on trust offices. DNB points out the following developments:

• In 2020, DNB reviewed the integrity policies of trust offices. Nine out of the twenty-one trust offices that DNB has assessed do not comply with the required integrity standards. DNB will initiate a follow-up investigation into those trust offices.
• Trust offices do not appropriately manage fiscal integrity risks. DNB concludes from its recent review that trust offices did not show the desired improvements. DNB will continue monitoring the developments in this area.
• DNB will assess the ultimate beneficial owners of trust offices on reputation, starting on 1 May 2021. This reputation assessment will only apply to new ultimate beneficial owners; DNB deems current ultimate beneficial owners to be compliant with this requirement. We refer to our previous newsletter for more information. This requirement also relates to providers of services for the exchange of virtual and fiduciary currencies, providers of custodian wallets, and exchange institutions.

Act implementing the Directive on the cross-border distribution of collective investment undertakings

On 8 January 2021, the Dutch government published a consultation of the Act implementing the Directive on the cross-border distribution of collective investment undertakings. The Act contains various amendments to the Wft which will be relevant for AIF and UCITS managers:

• The Act harmonises the definition of pre-marketing. According to the new definition of pre-marketing, a manager will fall under this definition if the draft prospectus or offering documentation will not enable an investor to make an investment decision. It is important to note that if a professional investor subscribes to the units within 18 months of pre-marketing communication, the pre-marketing will be considered an offering pursuant to the Wft, and thus requiring a licence or notification to the competent authority.
• The de-notification process of units in EU countries will be harmonised. A manager can stop offering units if the manager (i) makes a general public offer to investors to purchase the outstanding units; (ii) modifies existing contractual arrangements with financial intermediaries; and (iii) investors face no extra costs or loss of information regarding the collective investment undertaking.
• Member states will no longer be allowed to require the physical presence of a manager when the manager wants to offer units to retail investors. Managers will be required to have facilities to provide certain services in member states to retail investors, such as the provision of key investor information, or the processing of purchase and redemption orders.

The consultation for the implementing Act is now closed. The Act will now be submitted to Parliament. Member states should implement the Directive before 2 August 2021. 

EU Capital Markets Recovery Package

To combat the adverse effects of the corona crisis on European capital markets, the European Parliament and the Council of the EU have published the EU Capital Markets Recovery Package (“CMRP”). The CMRP contains targeted ‘quick fix’ amendments to various rules, aimed at facilitating the EU’s economic recovery from the COVID-19 pandemic. The CMRP introduces the following changes:

• Amendments to MiFID II which will result in simplified information requirements for investment firms relating to costs and charges disclosures, a targeted exemption allowing investment firms to bundle research and executions costs concerning research on small and mid-cap issuers, and adapted position limits for certain commodity derivatives.
• Amendments to the Prospectus Regulation introducing a short-form ‘EU Recovery Prospectus’. The EU recovery prospectus is available for capital increases of up to 150% of outstanding capital within 12 months. Due to the uncertainty regarding the developing crisis, the new regime will apply until 31 December 2022.
• Amendments to the Securitisation Regulation and Capital Requirements Regulation extending the existing EU framework for simple, transparent and standardised securitisations to cover synthetic securitisations.

The European Parliament and the Council adopted the first two topics of the CMRP on 15 February 2021. The Council will vote on the third topic in March 2021.

ESMA and EIOPA cloud outsourcing guidelines

ESMA published its guidelines on cloud outsourcing on 18 December 2020. The ESMA guidelines are in line with guidelines on outsourcing to cloud service providers released by the EBA and EIOPA in previous years. The guidelines contain helpful information on arranging compliant outsourcing arrangements for investment firms and cover topics like governance, possible contractual provisions, and access and audit rights.