The laws on financial products have serious flaws and financial markets supervisor AFM has too much autonomy in imposing its own rules and requirements. Lawmakers have to make a clear choice, says lawyer Frank ’t Hart, who recently obtained his PhD.
Frank ’t Hart knows what he is talking about when he tells people about financial supervision, open standards and the Financial Markets Authority (Autoriteit Financiële Markten – AFM). Financial law has had his full attention ever since he started as a lawyer at law firm Stibbe in 1992. From 1999, he was a legal counsellor at SNS Reaal bank and experienced in person the challenges that financial institutions face when rules need to be observed. In 2008, ‘t Hart returned to being a lawyer and he opened his own office, Hart Advocaten, in Amsterdam in 2011.
’t Hart lectured at the Banking and Insurance School of the University of Amsterdam. This school is a collaborative initiative of the Faculty of Economics and Business and the Faculty of Law. After having been invited by the school to write a PhD thesis, ’t Hart received his doctorate in December 2017 for his dissertation on the duty of care in the financial services sector.
In his dissertation, ’t Hart describes in which way and in which phases financial companies will have a duty of care. Much of the legal basis of duty of care is found in extensive legal requirements laid down in the law on financial supervision (Wet financieel toezicht – WFT). For instance, no later than in the early stages of developing a new product, it needs to be ascertained if the product in question will be beneficial for consumers. The law also sets out how and by whom financial intermediaries may be paid for the part they play in product distribution. And the sale of a product is not legal unless the consumer has had a fair chance to consider the pros and cons of the product.
‘Any company that sells a product has the legal duty to ensure that its product works in accordance with the legitimate expectations of the buyer’, says ’t Hart. ‘But financial companies also need to comply with a specific duty of care, which includes extensive information and cautionary requirements, and may even demand that a transaction is cancelled.’
’t Hart believes that legal provisions such as these are fair. ‘Financial institutions play an important role in society. This has been confirmed by the Dutch Supreme Court. Consumers should be confident that they can rely on banks and insurance companies.’
It is the AFM’s duty to supervise compliance to the WFT and take measures when non-compliance takes place. Additionally, AFM tries to push markets in the right direction by clarifying the many open standards in financial laws and regulations. Some examples of open standards include: the requirement that advice must be ‘appropriate’, or the requirement that a bank gathers ‘all necessary’ client details. ‘AFM’s interpretation of specific open standards is useful,’ says ’t Hart, ‘as it gives financial institutions something to go on. Should a conflict arise at some point, parties can go to court.’ Eventually, it is the court and not AFM that rules if a standard has been observed or if it was breached.
Unfortunately, however, AFM also chooses to take on tasks that are not part of its legal mandate. It will do this often on the occasion of the publication of general research, for instance when the results of a survey on how various financial institutions deal with a specific issue are made public. ‘AFM often publishes, in general terms, its findings on what goes wrong and on the best way forward. What the general public picks up from this is that the institutions do not comply to the law, but this perception may be completely unfounded. Maybe AFM simply believes that companies, with regard to a certain issue, should behave in a certain way, but that there is no law to enforce this behaviour.’
In ’t Hart’s opinion, AFM should distinguish between violations of the law and desirable behaviour and he notes with concern that the supervisory body does not do this.
’t Hart brings up the example of fixed-term savings accounts. These accounts have higher interest rates, because the funds are entrusted to the bank for a longer period of time. ‘AFM believes that the customer should be allowed to put in an early claim to have these savings released early, without incurring a penalty, in the case of what are referred to as life events such as a divorce or loss of job. This has, however, not been laid down in any law and also runs against the savings agreement. It is of course up to AFM to consider this a fair practice but it is not fair when AFM uses its position of power to impose this practice on any market party.’
The point is that financial institutions feel considerable pressure to conform to ‘desirable’ standards even when these do not have a legal basis. Should the institutions choose to resist AFM’s suggestions, AFM, not having any legal tools, will then increase pressure indirectly. ‘Institutions know that resistance may trigger a supervisory investigation and that any investigation may lead to the identification of breaches. Another tool to exert pressure is the review that is carried out with regard to new and incumbent board members. Institutions fear that the outcome of the review may be affected if they do not conform to AFM’s wishes.’
’t Hart believes that a clear choice needs to be made with regard to what can and should be expected from financial regulations. ‘Financial supervision is currently very product-related, with a focus on the need to caution and inform consumers, and the eventual responsibility of the consumer to make a decision.’
The central question, according to ’t Hart, is about how extensive the protection by the law should be. ‘Current regulations are basically sufficient if we accept the fact that well-informed consumers will sometimes make unwise decisions. The principle is that consumers have been provided with the information needed to take a wise decision, and that then exempts the financial institution from any further duty of care. If the consumer experiences any damage later on, he’ll have to foot the bill himself.’
’t Hart continues that if we are not willing to accept that consumers can make unwise decisions, we will need to make new laws. ‘These laws should include the introduction of a duty to provide advice, or the duty to not sell a product. Currently, the duty to not sell a product only applies in the case of excessive lending.’ Today, we fail to make a clear choice. ‘And so there is sometimes an unfounded expectation that AFM will protect consumers more than is actually required from financial institutions.’
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