The Netherlands

Author: | Published: 9 Jul 2001
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Market structure and trends

Supervision of the financial sector in The Netherlands comprises supervision of banks, investment institutions, securities institutions, insurance companies and securities exchanges and is regulated under national, international and supranational rules. Over the last few years, the financial sector has become more dynamic and complex. A significant trend has been the interrelationship of financial institutions and products. Recently, the supervisory authorities established the Council of Financial Supervisory Authorities (Raad van financiële toezichthouders) for issues that concern more than one supervisory authority. In this article we will first give an overview of the supervision of the financial sector and the regulations concerned, after which we will elaborate on the supervision of credit institutions.

The main supervisory authorities and their powers

The Dutch Central Bank (De Nederlandsche Bank, DNB) is the supervisory authority charged with the supervision of credit institutions according to the Credit System Supervision Act 1992 (Wet toezicht kredietwezen 1992, WTK) and of investment institutions (ie investment corporations and investment funds) according to the Investment Institutions Supervision Act (Wet toezicht beleggingsinstellingen, WTB).

The supervisory authority responsible for the securities trade is the Securities Board of The Netherlands (Stichting Toezicht Effectenverkeer, STE). Under the Securities Transactions Supervision Act 1995 (Wet toezicht effectenverkeer 1995, WTE), the STE supervises the securities exchanges and the off-exchange securities trade. Supervision of the securities exchanges however, will not be discussed in this chapter.

According to the Insurance Industry Supervision Act 1993 (Wet toezicht verzekeringsbedrijf 1993, WTV) the Insurance Supervisory Board (Pensioen- en Verzekeringskamer, VK) is the body charged with supervision of, inter alia, the insurance companies.

Types of financial institutions and key legislation

Credit Institutions

Credit institutions fall under the scope of the WTK. The supervision of credit institutions has been extensively harmonized through various European directives. Pursuant to the WTK, an enterprise or institution whose business is to receive funds repayable on demand or subject to notice being given, and to grant credits or investments for its own account is considered as a credit institution. In principle, it is prohibited to operate as a credit institution in The Netherlands unless a licence has been obtained to engage in such operations either in The Netherlands or in another member state. A member state means a member state of the EU as well as a state which is not a member of the EU but which is party to the Agreement relating to the European Economic Area (Norway, Liechtenstein and Iceland). The WTK provides for a notification procedure for financial institutions (which provide financial services except for raising deposits and other repayable funds) from other member states which have obtained a certificate of supervised status in their home country, under which these institutions may provide services in The Netherlands and are entered in the WTK-register.

According to the regulation to implement article 1 of the WTK a number of institutions or enterprises are not considered credit institutions, including: (i) an enterprise or institution whose business is to receive funds repayable at two or more years' notice from enterprises or institutions which do not form part of the public, and to grant loans or make investments for its own account; (ii) an enterprise or institution which forms part of a group and whose business is to receive funds repayable on demand or subject to notice being given and to grant loans or make investments for its own account, provided that a number of conditions are satisfied (called special financial institutions); and (iii) an enterprise or institution which issues debt certificates with a rating given by a recognized rating agency exclusive to enterprises and institutions which do not form part of the public, and uses the moneys raised to acquire a homogeneous group of assets from another enterprise (called the special purpose vehicle in an asset securitization transaction).

Under the WTK persons are prohibited from receiving funds, repayable on demand or subject to notice being given, from the public in the course of his occupation or business. Likewise, persons are prohibited from acting as intermediary for the purpose of soliciting funds from the public. This prohibition does not extend to, inter alia, registered credit institutions and, according to the regulation on exemption from article 83 of the WTK, among others, the acceptance of repayable funds against the issue of securities, provided that the securities are issued in conformity with the WTE.

Investment institutions

The supervision of the investment institutions is regulated under the WTB. Under the WTB, an investment institution is defined as an investment corporation or investment fund that raises or has raised moneys or goods for collective investment with a view to sharing the proceeds of such investments among its participants. An investment corporation is usually organized in the form of a public limited liability company (naamloze vennootschap). An investment fund is not a legal entity but is based on a contractual arrangement between the investors or participants, the fund manager who manages and invests the moneys raised and the depositary or custodian which is entrusted with the safekeeping of the fund's assets.

Under the WTB, it is prohibited to raise moneys or other goods in or from The Netherlands for participation in an investment institution, or to offer participation rights in an unlicensed institution, beyond a restricted circle, unless a licence has been obtained. The prohibition extends to investment institutions as well as to any offerors of shares in investment institutions. This prohibition does not apply to an institution which collectively invests in securities (instelling voor collectieve belegging in effecten, ICBE). For this exception, certain requirements have to be met. This exception also applies to ICBE's established in another member state and, inter alia, which are in the possession of a European passport.

The WTB provides a general exemption from this prohibition in the event that moneys or other goods for collective investment are raised or obtained from, or participation rights in investment undertakings are offered to, professional market parties only. In addition to the above exemption the DNB is of the opinion that venture capital funds will not be considered an investment institution within the meaning of the WTB provided certain requirements are met.

Securities institutions

The supervision of the securities trade is laid down in the WTE. The provisions of the WTE apply, inter alia, to the offering of securities and to the rendering of securities services. According to the WTE it is prohibited to offer securities upon issue in or from The Netherlands beyond a restricted circle, without making a prospectus available. This prohibition also applies if the shares are or will be listed on a stock exchange outside The Netherlands. The offering of securities will not be discussed in this article.

The WTE also contains a general rule prohibiting the offering or rendering of services as a securities intermediary or portfolio manager (together referred to as 'securities institutions') without a licence. There are various statutory exceptions (set out in the WTE) to this prohibition as well as general exemptions (set out in the Exemption Regulation pursuant to the WTE) from this prohibition. One exception to the prohibition applies, inter alia, to credit institutions licenced and as such registered through the DNB, which may render investment services pursuant to their banking licence. Another exception applies to securities institutions from member states which may render their services under their home state licence and which have followed the notification procedure (called the European passport holders).

Insurance companies

Insurance companies are subject to supervision of the Insurance Chamber pursuant to the Insurance Industry Supervision Act 1993. The WTV is applicable to: (i) insurance companies who conduct their business through a legal entity with its registered office in The Netherlands; and (ii) foreign insurance companies with respect to (a) insurance business they conduct through a branch office or agency and (b) provision of services to The Netherlands (cross-border insurance).

Establishing a credit institution operation

The licence requirements of credit institutions as set out in the Credit System Supervision Manuel of the DNB are summarized briefly below. The applicant must apply to the DNB for a licence. The application for a licence is a time-consuming procedure of close consultation with the DNB. If a foreign credit institution plans to set up an establishment in The Netherlands – not being a branch of a credit institution established in another member state – the DNB will require a statement setting out the manner in which the competent foreign supervisory authority exercises consolidated supervision. The DNB also wishes to be informed of the manner in which the head office or the parent company exercises control over the Dutch-based establishment. In the case of a branch largely the same information must be supplied as in the case of a credit institution establishing its head office in The Netherlands.

The DNB grants a licence to a credit institution if the applicant shows that the following licence requirements are fulfilled, which also applies to a licence granted to a branch of a credit institution not established in a member state, even though the requirements may not or only partially be applicable:

  • the institution must have a minimum amount of equity of euro 5 million ($4.3 million). Depending on the programme of operations, a larger amount of equity will be required;
  • the day-to-day policy of a credit institution must be determined by at least two persons. The DNB may object to persons determining the day-to-day policy, in terms of either expertise or trustworthiness. The test against the criterion of expertise, which was made prior to the appointment, is generally conducted on the basis of education, professional expertise and references. The position to be held will also be taken into consideration. The test against the criterion of trustworthiness is conducted in part on the basis of the references given, as well as on the information available to the DNB or to other supervisors in the financial sector. Police records may also be consulted;
  • furthermore, credit institutions which are a public limited liability company or a private limited liability company (besloten vennootschap) must have a supervisory board comprising at least three persons. If the credit institution has another legal form, a comparable body must be in place. The members of the supervisory board are vetted for trustworthiness in the same way as the directors;
  • if the credit institutions form part of a group, the directors of that group who (co-) determine the day-to-day policy of the credit institution are also vetted for expertise. Group directors who (co-) determine policy, and therefore the policy of the credit institution, are vetted for trustworthiness;
  • control exercised by a person who has a direct or indirect interest of more than 5% in the issued capital of a credit institution (or who is able to exercise, directly or indirectly, more than 5% of the voting rights or a comparable degree of control in a credit institution) must not be such that it is contrary to sound banking policy. If such interest or control could lead to an influence on the credit institution that is contrary to sound banking policy, the DNB may refuse the licence.

In principle the DNB must decide on a licence application within 13 weeks after receipt of all the required information. If a credit institution has obtained a licence, it is permitted to undertake all financial activities, such as raising moneys, granting loans and issuing payment means. It is also possible to undertake activities in other member states by way of branches or certain types of subsidiaries (under the European passport). If the credit institution that has obtained a licence does not comply with the above requirements, the DNB has powers to take special measures. These measures vary from the power to give directions (aanwijzingen) to the ultimate sanction of withdrawing the licence. Decisions of the DNB to refuse the licence, to give directions or withdraw the licence are decisions on which objection can be lodged in an objection procedure at the DNB. Appeal can be lodged with the District Court at Rotterdam against the DNB decision rendered in that objection procedure.

Financial services online/e-banking

In view of the increasing use of internet in the financial services sector the supervising authorities have tightened up their policies. Accordingly, the DNB has published policy rules concerning the use of the internet for financial services. These policy rules were not restricted to the use of the internet, they included rules for media in general. The DNB is of the opinion that whether a person or legal entity is active on the Dutch market depends on whether the activities pursued by the person or legal entity through media, target residents or enterprises and entities established in The Netherlands. This is judged on a case-by-case basis, whereby at least indicators will be taken into account, such as failure to include The Netherlands in the list of countries that are expressly not the target of the activities, the use of the Dutch language as the official language for the activities, the fact that The Netherlands is part of the regular area of distribution of the chosen media and the providing of information about the Dutch tax regime.

Buying financial institutions

Qualifying holdings

The WTK contains rules both for participating interests of credit institutions and for participating interests in credit institutions. A declaration of no-objection must be obtained for a qualifying holding of a credit institution in another enterprise, if this holding amounts to 10% or more. A declaration of no-objection is also required for corporate reorganization. This may be the case if a group, of which the credit institution forms part, is restructured or if the institution is given a different legal form. Also, a declaration of no-objection must be obtained for a direct or indirect participation in a credit institution if the participation is a qualifying holding, which roughly means that control can be exercised (equivalent to the control attending) by a holding of 5% of the issued capital of the credit institution. The DNB may give directives (voorschriften) to holders of a declaration of no-objection relating to a participating interest in a credit institution.

Applications for a declaration of no-objection must be submitted to the DNB. The DNB must decide on this application within 13 weeks. Declarations of no-objection may be refused if the DNB deems the participation will lead to, among other things, a situation that is contrary to sound banking policy, or to an undesirable development of the credit system. Objection and appeal may be lodged against this refusal.

Public offers

According to prevailing legislation, public offers must comply with the rules contained in the Merger Code (Fusiegedragsregels). The Merger Code is a set of rules of conduct and, as such, does not have statutory force. However, the provisions of the Merger Code are generally adhered to by the market players. In the near future public offers will be regulated by the rules implemented in the WTE. With provisions pertaining to the timing, accuracy and completeness of the information provided to the public on the offer, these merger rules purport to establish a level playing field for all shareholders of the target, enabling them to make a proper judgment on whether to accept the offer, thereby also avoiding insider dealing.

Competition regulation

On the basis of The Netherlands Competition Act (Mededingingswet), an intended concentration, ie a merger, acquisition, or (concentrative) joint venture must be notified in advance to the Director General of The Netherlands Competition Authority (Nederlandse mededingingsautoriteit, NMA), and may not be established prior to the Director General having granted permission, if the joint worldwide (group's) turnover of the enterprises involved exceeded Gld 250 million ($96 million) in the preceding calendar year and of which at least two of the enterprises involved achieved at least Gld 30 million of this turnover in The Netherlands. If a credit institution is involved in a concentration in the above sense, the turnover is substituted by a one-tenth part of the fixed and floating assets, of which at least Gld 50 million of material fixed assets must be in The Netherlands.

The temporary holding of participations in another enterprise by credit institutions or other financial institutions is not considered a concentration if a number of conditions are met. This must concern a credit institution or another financial institution within the meaning of the WTK, whose normal activities include the trading in securities for own account or for the account of third parties. Furthermore, the securities must have been acquired with the view to reselling thereof. This resale should be effected within one year after the acquisition of the participation. The voting rights attached to the participation may not be exercised in order to determine the market behaviour of this enterprise, unless the voting rights are exercised in order to prepare for the sale of this participation.

Continuing banking supervision

Banking supervision is continuing to ascertain that the credit institution permanently meets the authorization and prudential requirements, the requirements as to the structure of the administrative organization, and the requirements on account of the structural policy. Prudential supervision seeks to safeguard the solvency and liquidity of individual credit institutions, in order to protect creditors' interests and also comprises supervision of the administrative organisation. The DNB supervises a credit institution's administrative organization, including its financial accounting system and internal control, as well as measures aimed at preventing conflicts of interest. The DNB has power to give the credit institutions recommendations and general directives for the conduct of their business in regard to the administrative organization. The objective is to stimulate the institutions to pursue adequate management of the risks inherent in their operations. The administrative organisation must be such as to ensure that a credit institution has at all times a reliable and up-to-date insight into, and overview of, its rights and obligations. In addition, safeguards must be in place to ensure that the statements can be produced on time, accurately and in conformity with the DNB's instructions and that the financial accounting system is easily accessible to the external auditor and to the DNB. Furthermore, the electronic data processing systems, which form the core of the accounting system, must be secured such to ensure optimum continuity, reliability and security against fraud. Internal control should mainly be aimed at safeguarding the quality of the financial accounting system and at checking whether the actual operations are in conformity with the policy formulated.

Credit institutions which have obtained a licence, must submit to the DNB, among other things, prudential returns regarding their operations. These returns provide the DNB with the information necessary for the performance of its supervisory task. The returns, which must be based on the reporting institutions' own accounting systems, must provide a true and fair view of the financial position and results.

Disclosure requirements

The DNB must be informed by the credit institution in advance of any changes in the number or the identity of the persons (co-) determining the day-to-day policy of the institution. Such a change in the number or the identity may not be effected if the DNB does not agree to this change (in time). The DNB must be informed forthwith of a change in the antecedents stated earlier. The DNB must also be informed by the credit institution forthwith if it fails to comply or to comply fully with the directives regarding solvency, liquidity or the administrative organisation. Furthermore the DNB must be informed by any natural person or legal entity whose participating interest in a credit institution changes such that it falls below 5%, 10%, 20%, 33% or 50%, or that the credit institution ceases to be a subsidiary of the legal entity.

When a bank becomes insolvent

The DNB has an extensive set of instruments for use in cases where the solvency or liquidity of a credit institution shows a dangerous development. The DNB can give the institution: (i) a binding direction (aanwijzing) on the course of action to be pursued; or (ii) put the institution into secret receivership (stille curator), meaning that all acts of the bodies of the institution require the approval of a person appointed by the DNB and that the instructions given by that person must be complied with; the receivership is secret in the sense that it is not made public. If the DNB is informed by the supervisory authority of another member state that a branch in that State of a credit institution established in The Netherlands does not or does not comply fully with the supervisory regulations, the DNB may draw the attention of that credit institution to that fact, and, if necessary, give a direction to pursue a certain course of action. If the credit institution fails to comply with the direction, the DNB may withdraw the communication and inform the supervisory authority of the other member state and the credit institution of this withdrawal in writing.

Liquidation

A licenced credit institution which has decided to liquidate its business in full or in part or to dissolve, must inform the DNB at least 13 weeks in advance of the manner in which the liquidation or dissolution is to be effected. A comparable obligation applies to the branches of credit institutions from member states.

Emergency regulations

In order to permit rapid and efficient winding-up of the business of a credit institution, the WTK provides for emergency regulations. The emergency regulations are comparable with suspension of payment (surséance van betaling). The WTK provides for a special regulation for bankruptcy (faillissement) of a credit institution in such way that no decision on a petition or action for bankruptcy of a credit institution shall be made until the DNB has expressed its views.

Collective guarantee scheme

The Collective Guarantee Scheme (Collectieve Garantie Regeling , CGR) provides for protection for creditors of and investors with credit institutions. In general, the CGR provides that the DNB pays compensation, subject to a maximum of euro 20,000 ($17,000), for balances which protected creditors hold with the insolvent institution and, in addition, likewise subject to a maximum of euro 20,000, for losses suffered by protected investors if the insolvent institution should be unable to return securities held on behalf of these investors. The compensation by the DNB is paid only once for each creditor of and each investor with each bank. Hence, the number of accounts held by a creditor at a credit institution or the number of investment transactions an investor has conducted with a credit institution are irrelevant. Creditors' and investors' claims on branches in other member states of credit institutions are covered by the CGR. Conversely, creditors' and investors' claims on branches in The Netherlands of credit institutions established in another member state are covered by the deposit guarantee scheme operative in that other member state.

Cease and desist under penalty and administrative fine

Since January 2000, the DNB has been empowered to impose an administrative fine (bestuurlijke boete) or to issue a cease and desist order under penalty (dwangsom) in the event of violation of any of a number of provisions set forth under the WTK. The DNB is also authorized to disclose which of the provisions has been violated as well as information about the violator.

Capital requirements and bank secrecy

Capital requirements

Solvency supervision by the DNB is designed to determine that the risks involved in banking do not exceed certain limits set by the DNB and also focuses on the availability of own funds to cover for any setbacks. Therefore, the DNB has issued solvency directives. These solvency directives seek to relate risk-bearing operations to the risk-bearing capital (actual own funds) by way of the calculation of a solvency ratio. Depending on the degree of risk involved in the various operations, the related assets are assigned a weighting coefficient. The total risk-weighted value of both on- and off-balance sheet items is divided into actual equity to obtain a ratio. The DNB may stipulate that the solvency directives it issues be applied on a consolidated basis. The solvency directives also seek to promote the spreading of risks through the large-exposure rule. Under the large-exposure rule a credit institution may not lend, in whatever from, an amount in excess of 25% of actual equity to a single debtor or a group of connected debtors. In principle, an item is considered a large exposure if the net risk (after application of exemptions and/or weighting percentages) exceeds 10% of actual equity.

Bank secrecy

Dutch legislation does not contain bank secrecy law. Bankers called to testify in court cannot invoke the principle of immunity based on a banker/customer relationship.

According to the WTK and unless specifically exempted, individual persons and agencies of the DNB are permitted to use confidential information obtained in the performance of their duties for that purpose only. International exchange of confidential information among supervisory authorities is allowed, provided that a number of conditions are satisfied. One of these conditions is that the secrecy of the information must be adequately secured.


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