On 12 January 2023, the Dutch Authority for Financial Markets (Autoriteit Financiële Markten, the AFM) published its supervisory agenda for 2023 (the AFM Agenda 2023) and its strategy for 2023-2026 (the AFM Strategy). The AFM Agenda 2023 describes the trends and risks in the financial sector and explains the AFM’s priorities and activities for 2023. These priorities follow from the renewed AFM Strategy.
Section 1 of the AFM Agenda 2023 describes the key developments in the financial sector. The AFM lists several trends it has identified:
Geopolitical and macroeconomic challenges
High inflation rates and high energy prices, partly caused by the Russian invasion of Ukraine, have a major impact on households and companies. They are also (in)directly affected by rising interest rates. So far, the financial markets have shown resistance to these challenges, but the AFM notes that (certain groups of) households continue to be vulnerable and that financial services providers will need to pay extra attention to their duty of care.
The AFM stresses the importance of the transition to a more sustainable society, whereby the financial sector can fulfil an important role. Reporting of companies on their sustainability performance and risks is a key factor. Although sustainable investments have become more popular, it is not always clear to investors how these investments contribute to the sustainability transition.
Digitalisation and platformisation
The manner in which financial products and services are marketed and purchased drastically changes due to digitalisation and platformisation. Regulation at European level is introduced to mitigate risks arising from this development. DORA aims to reinforce the digital resilience of companies and MiCA is the first step in regulating cryptos.
In addition, the AFM identifies risks for each of the AFM’s four supervisory areas:
The three main risks for this area are complex pension transition, over extension of credit to consumers due to high inflation and easy access to high risk products such as cryptos.
Geopolitical and macroeconomic challenges, digitalisation and market dynamics are the three main risks that might detract from the orderly functioning of capital markets.
According to the AFM, the strategic repositioning of parties and outsourcing, digitalisation and technological developments (including cyberattacks) and the sustainability transitions will be the most important risks for the asset management sector.
Reporting and audit firms
Not only digitalisation and sustainability poses risks to this sector, but the changes in supervision of this sector brings new challenges and risks.
In Section 2 of the AFM Agenda, the AFM sets out the AFM Strategy for the next three years. The AFM’s mission is to promote fair and transparent markets and to contribute to sustainable well-being in the Netherlands as an independent market conduct authority. It pursues this mission by applying a supervisory approach that is risk-based, data-driven and result-oriented. The supervision of the AFM is directed by the three main trends it identified: sustainability, digitalisation and internationalisation.
Based on this strategy, the AFM formulates priorities and key activities for 2023 in Section 3 of the AFM Agenda. The following seven topics will be the main focus of the AFM in 2023:
1. Ongoing digitalisation
3. Transition to a new pensions system
4. Putting the customer’s interest first
5. Implementation of the renewed audit and reporting quality strategy
6. Use of data in and for supervision
7. Exerting international influence
The AFM set outs more detailed priorities and key activities for each of the four supervisory areas:
Priority 1: digitalisation should be in the customer’s interest. In this context, the AFM will undertake the following activities:
‒ Prioritising the supervision of neo-brokers.
‒ Cooperate in an EU review of online marketing directed at retail investors and whether this is in the customer’s interest.
‒ Conduct an internal review of crowdfunding platforms.
‒ Monitor whether innovative insurance products put the interest of customers first.
‒ Follow-up on the manner in which insurers use customer data for the purpose of determining insurance premiums at individual level.
Priority 2: Responsible choices for a healthy financial future. The AFM intends to undertake, among others, the following activities:
‒ Implement new requirements for the pension transition, such as decision-making guidance, risk preference assessment, the communication plan, pension advice, provision of information and engagement confirmation.
‒ Review ‘marginal pension schemes’.
‒ Conduct a follow-up review of the correctness of pension information.
‒ Examine whether automated acceptance processes ensure that the loans customers are provided with entail a responsible level of borrowing.
‒ Investigate how ‘buy now, pay later’ services should be supervised.
Priority 3: A safe financial transition to a sustainable society. The AFM describes the following key activities it will carry out:
‒ Conduct an internal review of the manner in which customers are asked for their sustainability preferences by asset managers and advisors.
‒ Enter into dialogue with pension provides about the Sustainable Finance Disclosure Regulation (SFDR).
Priority 1: Supervision of cross-platform market abuse. The AFM will carry out the following activities in this regard:
‒ Increase its knowledge in this area, by cooperating with other supervisory authorities, especially in relation to commodity derivatives and the energy market.
‒ Increase its knowledge of algorithmic trading and machine learning.
‒ Shorten the turnaround times of enforcement procedures.
Priority 2: Adequate control of key elements of the capital markets. The following activities are relevant:
‒ Conduct thematic reviews at proprietary traders, trading platforms and post-trade parties in respect of subject such as information security, algorithmic trading, remuneration policy and culture of the organisation. Where relevant, the AFM will do so in collaboration with DNB in the context of IFD/IFR.
‒ Examine risks that may cause a disruption of the capital markets and control measures taken to prevent these risks.
‒ Intensify supervision of institutions that play a major role in the robustness of the capital market.
‒ Present its position in EU negotiations on laws and regulations, among which the review of MiFIR, BMR and CSDR.
Priority 3: Compliance with new sustainability regulations and energy transition. The following activities will be undertaken by the AFM:
‒ Enhance supervision of the energy market.
‒ Review of the market for ESG-related products and the energy transition.
‒ Focus on sustainable financial products in the supervision of prospectuses.
Priority 4: Intensification of data-driven supervision. In relation to this priority, the AFM plans to carry out the following activities:
‒ Monitor compliance with reporting under MiFIR and STORs.
‒ Cooperate with national and international supervisory authorities to improve data quality.
‒ Improve data collection and structure and develop new instruments for data analysis.
Priority 1: Asset managers will maintain sound and controlled business operations (including outsourcing). The AFM elaborates on this priority by setting out, among others, the following activities:
‒ Conduct thematic reviews of the sound and controlled business aspects of the asset management sector’s business operations, whereby special consideration is given to outsourcing.
‒ Invest in account supervision of large and complex asset managers.
‒ Develop a comprehensive risk overview of the investment firm sector for the purpose of supervising IFR/IFD.
‒ Carry out investigations into financial crime in the context of anti-money laundering supervision.
‒ Apply a risk-based approach in processing (fund) notifications, signals, assurance reports and depository reports.
Priority 2: Supervision of compliance with new sustainability regulations. The AFM will work on the following activities:
‒ The AFM’s position on the supervision of sustainable financial investment priducts.
‒ Supervision of compliance with SFDR.
‒ Discourage greenwashing.
Priority 3: Effects of digitalisation and technology under control. The AFM intends to undertake the following activities:
‒ Monitoring current developments such as digitalisation, cryptocurrencies and Artificial Intelligence.
‒ Investigate potential risks attached to digitalisation.
‒ Prepare the supervision of new regulations, such as DORA and MiCAR, for example by drawing up guidelines and Q&As.
Reporting and audit firms
Priority 1: Companies provide clarity on their impact on people, the environment and society and on how these factors affect the companies themselves. Some of the key activities in this area are:
‒ Investigate to what extent companies include disclosures on ESG in their reporting.
‒ Prepare companies for the entry into force of the Corporate Sustainability Reporting Directive.
Priority 2: As good gatekeepers, audit firms will identify fraud and (imminent) bankruptcies in good time. The AFM’s key activities in this regard are:
‒ Complete review of the analysis of fraud risks by audit firms.
‒ Develop a data position with regard to fraud and continuity risks.
Priority 3: The AFM calls for attention to be given to detrimental incentives in the market for statutory audits and to the statutory auditor’s independence in particular. The AFM will undertake the following activities in this respect:
‒ Review compliance with the standards of the system of quality control.
‒ Review the detrimental incentives in relation to statutory auditors’ independence created by the simultaneous provision of audit and non-audit services by audit firms with a regular licence.
Priority 4: Improvement of our risk-based and data-driven supervision. This involves the following proposed activities:
‒ Development of the data position in relation to audit firms.
‒ Development of an algorithm that predicts the most high-risk financial statements for the purpose of reporting supervision.
Other priorities that are not specific to a supervisory area are combatting criminal behaviour, financial stability and the improvement of its professional organisation.
Section 4 and the Appendix of the AFM Agenda 2023 respectively contain information on the AFM’s finances in 2023 and the external key performance indicators used by the AFM.