Annual report 2013: fairness and security are the biggest challenge for the financial sector

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The biggest challenge for the financial sector in the next few years is to create a business culture of fairness and security. This applies equally to trading in the capital markets and the servicing of corporate and retail customers. Without a culture of genuine security and fairness, confidence in the financial markets will not adequately recover.

This was the message from Board member Theodor Kockelkoren accompanying the publication of the annual report of the Netherlands Authority for the Financial Markets (AFM) on Tuesday 22 April. “For the financial sector, 2013 was a year where the main issue was integrity; a year in which it again became clear that security and fairness are core values that the financial world has to work hard for to achieve.”

Merel van Vroonhoven, who became Chairman of the Executive Board of the AFM on 1 April, added her first impressions: “I can see that the financial sector has made significant progress. Intentions are good, and ambitious plans are in place. But are we where we want to be? Is it not a cause for concern that consumer confidence is still low and actually declining, despite the positive developments? And that while there are improvements, undesirable incidents are still occurring? Is the sector sufficiently in step with the rest of society?”

The right direction

Last year saw a number of sizeable breaches of integrity that once again damaged public confidence in the financial sector. Kockelkoren referred to incidents including the Libor scandal, the failure of Dutch auditors in their auditing of financial reporting and the critical assessment of risks, and the high fines that the AFM imposed on providers of pay-day loans.

At the same time, the AFM can see that the sector is moving in the right direction to restore confidence, even though there is still a long way to go. Insurance companies are engaged in finding a fair settlement for insurance policies with excessive charges; work is in progress on a more honest presentation of pensions; auditors have taken initial measures to improve the quality of their work and are demonstrating their readiness to do so; independent advisers have made good progress in adapting to the ban on inducements for complex financial products.

The banks and insurers moreover made steady and further progress on putting their customers’ interests first in 2013. The score for this assigned by the AFM has risen from 3.3 in 2012 to 3.5 in 2013 (on a scale of 1 to 5). The evaluation did however show that banks and insurers have lower scores on aspects that until now have been less of a priority for the AFM.

“If the sector had a strong culture of security and fairness, this phenomenon would probably disappear”, says Kockelkoren. “Supervision focusing on putting the customer’s interests first is gradually leading to better products and services. At the same time, the public will only trust the financial sector if there is the feeling that the sector is effecting change on the basis of genuine intentions.”

Accelerating the restoration of confidence

Van Vroonhoven announced that she would engage in discussions with market parties, industry organisations, interest groups, fellow supervisors and other stakeholders in the coming months. The central question here will be what is needed to accelerate the restoration of confidence in the sector and what the obstacles are to this.

There will also be several subsidiary issues to discuss, such as whether market parties are able to embrace various points of view and give other competences, generations and innovative outsiders the opportunity to do things differently.

Effective supervision

Van Vroonhoven will also discuss the role the AFM and its supervision can play in accelerating the restoration of confidence. The AFM strives to make its supervision as effective as possible. It continually adjusts its supervision to reflect changing circumstances. Each subsector is different, and may require a different approach.

Supervisory measures are simply a means to an end. The focus of the AFM is shifting to activities that encourage behaviour that accords with standards, for instance the role of the orientation point in the introduction of new legislation. A letter or a discussion may be sufficient in some cases to prompt an institution to change its behaviour. A more informal approach is also becoming more common in cases where instructions are issued. The effect is the same as with a formal approach, however a less formal approach is more efficient and reduces the administrative burden.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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