Towards an integrated supervisor: experiences from The Netherlands

1. Towards an integrated supervisor: experiences from The Netherlands Aerdt Houben Head Supervisory Strategy department De Nederlandsche Bank Washington D.C., 6 June 2006

2. Outline 1. What determines the structure of financial supervision? • International trend towards integrated supervision • Advantages of integrated supervision • Alternative cross-sectoral models: one size does not fit all 2. Why did The Netherlands reform, and how? • Background • Steps towards the new framework • The Twin Peaks model: merger and reorganization • What have we accomplished so far? • Early experiences • First results

3. 1. International trend towards integrated supervision 1971 2002 2003 2004 2006 1985 1987 1988 1992 1999 2000 Norway Denmark Austria Germany Estonia Australia Iceland Ireland Czech R. Slovakia Canada Belgium The Netherlands AFM: CONDUCT DNB: PRUDENTIAL Singapore UK Japan Hungary Sweden

4. 1. Advantages of integrated supervision • Enhances the overall quality of supervision: • Promotes cross-sectoral consistency of supervision • Facilitates better monitoring of the financial system • Allows rapid policy responses • Reduces scope for regulatory overlap or white spots • Maximizes economies of scale and scope in supervision • Strengthens accountability

5. Alternative cross-sectoral models: one size does not fit all Prudential and Conduct-of-Business supervision integrated? yes no “One Peak” Singapore, Ireland, Czech Republic, Slovakia yes “Twin Peaks” The Netherlands Integrated with Central Bank? “FSA” UK, Japan, Canada Scandinavia, Belgium and more “Three Peaks” Australia Germany,Austria no

6. Outline 1. What determines the structure of financial supervision? • International trend towards integrated supervision • Advantages of integrated supervision • Alternative cross-sectoral models: one size does not fit all 2. Why did The Netherlands reform, and how? • Background • Steps towards the new framework • The Twin Peaks model: merger and reorganization • What have we accomplished so far? • Early experiences • First results

7. 2. Background • Need for change: Increasing demands on supervisor’s effectiveness and accountability • Key consideration (1): Interwoven financial sector (products and institutions) • Key consideration (2): Concentrated financial sector • Path dependence: Central Bank with • established reputation • extensive financial sector and supervisory expertise • autonomous administrative authority

8. 2. Steps towards the new framework • Removal of barriers to financial conglomerates (1990) • Council of Financial Supervisors established (1999) • New supervisory structure: establishment AFM (2002) • Merger between DNB and PVK (2004)

9. 2. Supervisory landscape before merger DNB-PVK and establishment AFM Sectoral Systemic Prudential Conduct of business Not typical securities Typical securities Per sector Cross sector Per sector Cross sector Credit institutions Mutual funds DNB DNB RFT DNB RFT STE Insurance companies Pension funds PVK PVK Securities firms STE STE

10. Systemic Prudential Conduct of business Per sector Cross sector Per sector Cross sector Credit institutions Mutual funds DNB AFM Insurance companies Pension funds Securities firms 2. Supervisory landscape after merger DNB-PVK and establishment AFM Functional

11. 2. The Twin Peaks model Before2004 DNB (banks, investment firms) Conduct supervision Prudential supervision Lender Of Last Resort Systemic Stability PVK (insurers, pension funds) Conduct supervision Prudential supervision STE/AFM (securities firms,exchanges) Conduct supervision Prudential supervision DNB AFM Prudential Supervision Market Conduct Supervision Conduct-of-Business Supervision After 2004 Systemic Stability Lender Of Last Resort

12. 2. Merger and internal reorganization required more than 2 years April 2004 Dec 2002 June 2003 phase 4 12 months phase 1 6 months phase 3 5 months Oct 2003 phase 2 4 months Strategy: behind the integration Planning: Integration process Implementation: from day 1 Completion: full integration • Formulate strategy and logic behind integration • Identify synergy targets • Determine main new modes of operation • Develop criteria for the implementation process • Develop new main organisational model Implement organizational structure and processes Monitor synergies and cost savings Develop plan of action for phase 4 Implement organizational structure and processes Monitor synergies and use replacement policy Resolve outstanding issues Develop detailed structure of organisational model Identify and implement quick wins Develop broad implementation planning Determine monitoring parameters and process for monitoring

13. Outline 1. What determines the structure of financial supervision? • International trend towards integrated supervision • Advantages of integrated supervision • Alternative cross-sectoral models: one size does not fit all 2. Why did The Netherlands reform, and how? • Background • Steps towards the new framework • The Twin Peaks model: merger and reorganization • What have we accomplished so far? • Early experiences • First results

14. 3. Early experiences • Increase in effectiveness and efficiency of supervision • Better view of overarching financial stability risks • Simultaneous integration/reorganization proved efficient • Institute specific labour agreement proved practical • Employees need time to adjust

15. 3. First results • IMF FSAP 2004 • Palmnet • FIRM • FTK • Vision on Supervision 2006-2010 More risk-oriented and transparent supervisory framework

16. Wrap-up Three propositions: • Supervisory structures are made-to-measure • Twin Peaks is optimal model for The Netherlands • Because of supervisory overlap, DNB and AFM need to cooperate closely

18. Towards an integrated supervisor: experiences from The Netherlands René Geskes Head Conduct of Business Supervision Authority for the Financial Markets Washington D.C., 6 June 2006

19. Agenda • Covenant DNB and AFM • Supervision in action: how does it work? • Regulation, policy and domestic and international consultations • Coordination on top level • Overlap in supervision

20. Covenant DNB and AFM • The new covenant between the AFM and the DNB was signed in 2004 • Agreement about • Licensing process • Investigations • Regulatory measures • Information exchange • Illegal financial institutions • and how to avoid getting in each other’s way

21. Covenant DNB and AFM • Functional division of supervisory responsibilities, distinguishing between general, market conduct and prudential aspects of business • and how to avoid getting in each other’s way General aspects of operations Organizational structure, strategy, reporting lines, proper management and internal (ICT) controls Market conduct-specific aspects of operations Client administration, separation of assets, complaint handling, client relations and supplying information to (prospective) clients, Chinese walls, insider dealing, price rigging and conflict of interest and compliance Prudential aspects of operations Solvency risk management (credit-, market-, operational-, liquidity- and insurance risk), financial guarantees, capital and large exposure reporting and prudent management in outsourcing activities

22. Covenant DNB and AFM credit institutions and insurers securities institutions and collective investment schemes General aspects of operations AFM DNB Market conduct-specific aspects of operations AFM DNB Prudential aspects of operations

23. Agenda • Covenant DNB and AFM • Supervision in action: how does it work? • Regulation, policy and domestic and international consultations • Coordination on top level • Overlap in supervision

24. Supervision in action: licensing DNB (prudential) Authorizes banks and insurance companies • Opinion on: • fit and properness of managers • operational management (including AO/IC) Sharing of information AFM (Market Conduct) Authorizes securities institutions and collective investment schemes

25. Supervision in action: Investigations • Planned investigations Sharing of planning and interim reports (each quarter) Prior to investigation request for relevant information Special wishes must be addressed! If suspected failing falls in field of other regulator: information request! • Unplanned investigations Notification of other regulator • Reporting Joint reporting or sharing of results with due observance of statutory secrecy provisions

26. Supervision in action: Information exchange Both supervisors must, either by request or on their won initiative, exchange information on institutions under their supervision! All data which supervised entities are required to supply (standard legal obligations) Examples: annual statements, management letters, auditor’s reports Exchange without notification to supervised entity • Standard information Is specific. Notification of exchange of such information unless undesirable in the interest of an ongoing investigation or other circumstances • Other information

27. Supervision in action: Supervisory measures • General measures Can be taken autonomously by each supervisor after – if possible - consultation of the other supervisor (unless impossible) • “Radical’ measures Power is confined to authorizing supervisor First – if possible – consultation of the other supervisor Non-authorizing supervisor may initiate a radical measure by issuing a substantiated advice to the authorizing supervisor!!! Authorizing supervisor assesses the advice against the principals of sound management – no fact finding!

28. Supervision in action: Illegal institutions • Covenant applies equally to actions against an institution that is unregistered yet requires authorization

29. Agenda • Covenant DNB and AFM • Supervision in action: how does it work? • Regulation, policy and domestic and international consultations • Coordination on top level • Overlap in supervision

30. Regulation, policy and domestic and international consultations • Co-ordination and mutual attuning promote the adequate arrangements of policies and regulations • Jointly advise of the Minister of Finance • Inform each other concerning current issues addressed within international co-operative bodies

31. Agenda • Covenant DNB and AFM • Supervision in action: how does it work? • Regulation, policy and domestic and international consultations • Coordination on top level • Overlap in supervision

32. Coordination on top level • Appointment of coordinators: Supervision Policy and regulation Domestic and international consultation • Board level meetings 4 times a year • Standing committees/temporary working groups if necessary

33. Agenda • Covenant DNB and AFM • Supervision in action: how does it work? • Lawmaking, policy and (inter)national coordination • Coordination on top level • Overlap in supervision

34. Overlap in supervision Supervision Coordination Bureau • Aim: limit the burden for supervised institutions • Register and resolve complaints concerning overlap in operational supervision by the AFM and DNB • Highlight problems where the pattern of complaints points to potential shortcomings in regulations, policy or implementation, that in turn call for longer-term solutions • Decision and take measures. The institution concerned will be notified of the position of the supervisory authorities