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 Belgium The Netherlands AFM: CONDUCT DNB: PRUDENTIAL 1988 Denmark 1999 Australia Iceland 2002 Austria Germany Estonia 1985 Norway 1992 Sweden 2000 UK Japan Hungary 1971 Singapore 2003 IrelandCzech 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 “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 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

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)

STE Securities firms PVK Insurance companies Pension funds STERFT DNB RFT 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 Resort Systemic Stability DNB AFM Prudential Supervision 2. The Twin Peaks model Systemic Stability Lender Of Last Resort Market Conduct Supervision Conduct-of- Business Supervision After 2004 PVK (insurers, pension funds) Conduct supervision Prudential supervision STE/AFM (securities firms,exchanges) Conduct supervision Prudential supervision Before 2004

2. Merger and internal reorganization required more than 2 years phase 2 4 months phase 3 5 months phase 1 6 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 4 12 months Dec 2002 June 2003 Oct 2003 April 2004 Planning: Integration process Implementation : from day 1

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

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 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

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 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

Covenant DNB and AFM credit institutions and insurers securities institutions and collective investment schemes DNB 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 exchange Both 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 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

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 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

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

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