towards an integrated supervisor: experiences from the netherlands aerdt houben head supervisory...

Towards an integrated supervisor: experiences from The Netherlands

Aerdt Houben Head Supervisory Strategy department

De Nederlandsche Bank

Washington D.C., 6 June 2006

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

3. What have we accomplished so far?• Early experiences• First results

1. International trend towards integrated supervision

1987

Canada

2004

BelgiumThe NetherlandsAFM: CONDUCT DNB: PRUDENTIAL

1988

Denmark

1999

AustraliaIceland

2002

Austria GermanyEstonia

1985

Norway

1992

Sweden

2000

UKJapan Hungary

1971

Singapore

2003

Ireland Czech R.Slovakia

2006

1. Advantages of integrated supervision

Enhances the overall quality of supervision:

1. Promotes cross-sectoral consistency of supervision

2. Facilitates better monitoring of the financial system

3. Allows rapid policy responses

4. Reduces scope for regulatory overlap or white spots

5. Maximizes economies of scale and scope in supervision

6. Strengthens accountability

1. Alternative cross-sectoral models: one size does not fit all

Integrated with Central Bank?

yes

Prudential and Conduct-of-Business supervision integrated?

yes

no

no“One Peak”

Singapore, Ireland,Czech Republic,

Slovakia

“FSA”UK, Japan, Canada

Scandinavia,Belgium and more

“Three Peaks”Australia

Germany, Austria

“Twin Peaks”The Netherlands

Outline




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

1. established reputation

2. extensive financial sector and supervisory expertise

3. autonomous administrative authority

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)

STESTESecurities firms

PVKPVKInsurance companies

Pension fundsSTERFT

DNB

RFT

DNB

DNB

Credit institutions

Mutual funds

Cross sectorPer sectorCross sectorPer sector

Typical securities

Not typical securities

Conduct of businessPrudentialSystemic

Sectoral

2. Supervisory landscape before merger DNB-PVK and establishment AFM

Securities firms

Insurance companies

Pension funds

AFMDNB

Credit institutions

Mutual funds

Per sector

Cross sector

Per sector

Cross sector

Conduct of businessPrudentialSystemic

2. Supervisory landscape after merger DNB-PVK and establishment AFM

Functional

DNB (banks,investment firms)

Conduct supervision

Prudential supervision

Lender Of Last ResortSystemic Stability

DNB AFM

Prudential Supervision

2. The Twin Peaks model

Systemic Stability Lender Of Last Resort

Market Conduct SupervisionConduct-of-

Business SupervisionAfter

2004

PVK (insurers,pension funds)

Conduct supervision


STE/AFM (securitiesfirms,exchanges)

Conduct supervision


Before2004

2. Merger and internal reorganization required more than 2 years

phase 24 months

phase 35 months

phase 16 months

Strategy: behind the 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

Develop detailed structure of organisational model

Identify and implement quick wins

Develop broad implementation planning

Determine monitoring parameters and process for monitoring

Implement organizational structure and processes

Monitor synergies and cost savings

Develop plan of action for phase 4

Completion: full integration

Implement organizational structure and processes

Monitor synergies and use replacement policy

Resolve outstanding issues

phase 412 months

Dec 2002

June 2003

Oct 2003

April 2004

Planning: Integration process

Implementation: from day 1

Outline




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

3. First results

• IMF FSAP 2004

• Palmnet

• FIRM

• FTK

• Vision on Supervision 2006-2010

More risk-oriented and transparent supervisory framework

Wrap-up

Three propositions:

1. Supervisory structures are made-to-measure

2. Twin Peaks is optimal model for The Netherlands

3. Because of supervisory overlap, DNB and AFM need to cooperate closely

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

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

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


• 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

Market conduct-specific aspects of operations

Prudential 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

Organizational structure, strategy, reporting lines, proper management and internal (ICT) controls

Solvency risk management (credit-, market-, operational-, liquidity- and insurance risk), financial guarantees, capital and large exposure reporting and prudent management in outsourcing activities


credit institutions and insurers

securities institutions and collective investment schemes

DNB

DNB

AFM

AFM

General aspects of operations

Market conduct-specific aspects of operations

Prudential aspects of operations

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

Opinion on:

• fit and properness of managers

• operational management (including AO/IC)

Supervision in action: licensing

DNB (prudential) Authorizes banks and insurance companies

Authorizes securities institutions and collective investment schemes

AFM (Market Conduct)

Sharing of information

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

• Reporting

Notification of other regulator

Joint reporting or sharing of results with due observance of statutory secrecy provisions

Supervision in action: Information exchangeBoth supervisors must, either by request or on their won initiative, exchange information on institutions under their supervision!

• Standard information

• Other information

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

Is specific. Notification of exchange of such information unless undesirable in the interest of an ongoing investigation or other circumstances

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

Non-authorizing supervisor may initiate a radical measure by issuing a substantiated advice to the authorizing supervisor!!!

Power is confined to authorizing supervisor

First – if possible – consultation of the other supervisor

Authorizing supervisor assesses the advice against the principals of sound management – no fact finding!

• Covenant applies equally to actions against an institution that is unregistered yet requires authorization

Supervision in action: Illegal institutions

Agenda



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

Agenda



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

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

Overlap in supervisionSupervision 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

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