Netherlands: Draft legislative proposal to increase the transparency of financial supervision ("naming and shaming")
Under a proposed new law in the Netherlands the financial regulators' powers to issue public warnings are expanded, supervised entities may be mentioned by name when comparative results of thematic examinations are published, and regulators may publicly respond to statements made by supervised entities regarding supervisory affairs. This article examines the proposals and considers whether sufficient safeguards have been included to avoid an innocent entity suffering reputation damage.
In June 2016, the Dutch Minister of Finance published a draft legislative proposal for the Act for the Transparent Supervision of Financial Markets (Wet transparent toezicht financiële markten, the Amendment Act) for consultation purposes. The Amendment Act will amend the publication powers of the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten – AFM) and the Dutch Central Bank (De Nederlandsche Bank – DNB) under the Dutch Financial Supervision Act (Wet op het financieel toezicht – FSA). Under the Amendment Act,1 (i) regulators' powers to issue public warnings are expanded, (ii) supervised entities may be mentioned by name when comparative results of thematic examinations are published, and (iii) regulators may publicly respond to statements made by supervised entities regarding supervisory affairs.
According to the draft explanatory memorandum to the Amendment Act (Memorie van toelichting, the Explanatory Memorandum), the Amendment Act is aimed at increasing the transparency of the operation and supervision of the financial markets.
The AFM and DNB are currently entitled to issue a public warning or statement in the event of a breach of a limited number of specific provisions of the FSA and European directives and regulations. The Amendment Act expands the scope of this power to all breaches that do not fall within the least serious category (for the purpose of categorising a fine). Thus breaches with potential fines of EUR 500,000 – EUR 2,500,000 could now be the subject of a public warning. This change is justified according to the Explanatory Memorandum, because the interests of third parties may be affected.
Publication of names of supervised entities
The AFM and DNB conduct thematic examinations of supervised entities, for instance to examine the level of compliance of supervised entities with regulatory requirements, and, in doing so, are bound by a strict duty of secrecy. For that reason, the results of the examinations are currently published without the names of the examined entities being mentioned. The Amendment Act allows the AFM and DNB to mention the names of the examined entities when they publish comparative results regarding the level of compliance with regulatory requirements in relation to such thematic examinations. According to the Explanatory Memorandum, the conclusions of the examination and the comparison have to be based on objective indicators and non-discriminatory criteria. The Explanatory Memorandum also obliges the AFM and DNB to ensure that the published information cannot be traced to parties other than the supervised entities concerned. It is questionable whether these safeguards and the general principles of proper administration (algemene beginselen van behoorlijk bestuur), ie the principles of proportionality and the fair balance of interests, are sufficient to properly limit the AFM and DNB in the use of these powers.
Public response to supervisory affairs
Supervised entities sometimes make public statements about supervisory affairs in which they are involved, such as ongoing investigations or court proceedings. Owing to their duty of secrecy, the regulators are currently generally not allowed to respond to such statements. The Amendment Act entitles the AFM and DNB to issue supplementary or corrective statements if this is necessary for the complete and correct provision of information to the general public.
Public disclosure of supervisory information can cause reputational damage and reduced confidence in the supervised entity, which is difficult to repair. Careful preparation and due process are therefore of the utmost importance before any publication is made. On the basis of the current version of the Amendment Act it is not clear that sufficient safeguards will be in place. The procedural requirements are aligned with the rules for the publication of fines imposed by the regulators, meaning that the regulators have to allow a standstill period of five days before public disclosure. Although the supervised entity can during this period ask the court for injunctive relief to avert the public disclosure, it is questionable whether such a limited period is reasonable, given the nature of the damage and the lack, in most cases, of an urgent need to publicly disclose the information.
It is also not clear how the proposals, particularly those concerning the publication of comparative information, fit in with the European regulatory framework and how they would impact the level playing field of Dutch supervised institutions within the European Union.
1 Although not further addressed in this article, the Amendment Act also provides for the possibility of DNB publishing the non-aggregated statistical data of banks which have their statutory seat in the Netherlands.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch firstname.lastname@example.org, or tel +44 20 3088 3710.