Individual accountability, the new regime for banks in the Netherlands

The “bankers’ oath” and the Code Banken

On 1st January 2010 the Dutch banking sector introduced a code, with the aim of restoring trust in the financial sector. This code ("Code Banken") was drawn up by the Netherlands Bankers Association ("NVB") in response to a report entitled "Restoring Trust" ("Naar herstel van vertrouwen"), which was published by the Advisory Committee on the Future of Banks ("Adviescommissie Toekomst Banken") on 7 April 2009. The Code Banken included a moral and ethical conduct declaration, to be signed by each individual member of the executive board, declaring that he or she shall perform his/her tasks in a meticulous, expert and fair manner, taking into account the applicable laws, codes of conduct and regulations (the so called "bankers’ oath"). Many principles of the Code Banken have since been implemented in statutory law. The Dutch Parliament (on its own initiative) amended the Act on Financial Services ("AFS"), with effect from 1 January 2013, to require the executive board of banks and insurers and the policy makers of Dutch financial undertakings to swear a bankers’ oath.

In 2014, the NVB, as a representative of the sector, suggested that the bankers' oath should apply to all bank employees and that disciplinary rules for individual accountability should be introduced and given a legal basis, which was supported by the government. In anticipation of the legislative changes, the NVB introduced a package called Future-oriented banking, including a Social Charter, an updated Code Banken and the bankers' oath with corresponding Rules of Conduct and a disciplinary system, as a further measure aimed at regaining the trust of society in the financial sector.

Extension of scope under the AFS

As of 1 January 2015 two further amendments have been made to the AFS in this respect. First, as part of the changes to the supervisory framework of the Dutch financial sector, the requirement for suitability and integrity, which already applies to the management board and supervisory board ("Executive Boards") of financial undertakings that are subject to prior regulatory approval, has been extended to a larger group of employees of banks. Secondly, the requirement to take an oath has been expanded to all employees, who will also be held individually accountable through a disciplinary regime if they do not comply with the applicable Rules of Conduct.

Although the details of the disciplinary rules have been left to the sector to decide, the legislator expects that the disciplinary rules will provide adequate safeguards for due process and will be applied and implemented by an independent and external disciplinary board. The disciplinary rules are not yet available, however, the NVB has already announced that the Dutch Securities Institute will fulfil the role of the independent disciplinary committee.

As the disciplinary rules have been given a legal basis in the AFS, the Dutch Authority for the Financial Markets (“AFM”) and the Dutch Central Bank (“DCB”) are authorised to supervise and monitor the correct implementation and application of the disciplinary rules by the banks.

We describe below how the suitability and integrity requirement, the oath, the Rules of Conduct and the disciplinary regime will apply.

Executive Board members of banks

For Executive Board members (supervisory board and management Board) of banks the requirement for suitability and integrity and the signing of a moral and ethical declaration (the bankers’ oath) remain in principle unchanged. Under the current regime, Executive Board members and other policymakers are subject to prior regulatory approval and will be subject to prior vetting for suitability and integrity by the DCB and AFM regulators. In addition, each individual member of the Executive Board is required to sign a moral and ethical conduct declaration, to the effect that he or she shall perform their tasks in a meticulous, expert and fair manner, taking into account the applicable laws, codes of conduct and regulations.

When applying for regulatory approval on behalf of these individuals, banks will have to submit a suitability and integrity form for each individual, setting out the areas of the firm that the prospective Executive Board member will be responsible for managing. Furthermore, banks will have to submit a suitability chart showing the overall division of responsibilities and expertise across the Executive Board. Vetting by the regulator will include interviews with the candidate.

Banks are also required to prepare, maintain and update a responsibilities charter, which is a single document which describes all of the firm’s management and governance arrangements, including details of reporting lines and responsibility, the scope of any delegation of responsibilities and consequential amendments to reporting lines.

Although the requirement in relation to the suitability and integrity of the Executive Board members remains unchanged, additional responsibilities have been introduced and these should not be underestimated as failure to implement, apply and supervise the new rules set out below will immediately raise questions about the suitability of the board members involved. Furthermore, the Conduct Rules and the disciplinary rules will also apply to the Executive Board members (see below).

(Senior) managers of banks

The amendment of the AFS introduces suitability and integrity requirements as of 1 April 2015 for "managers right below the level of the Executive Board that have final responsibility for activities of employees that can have a significant impact on the risk profile of the bank (or insurance company") (articles 3:8 sub 1 and 3:9 sub 1 AFS) ("Affected Staff"). The effect of this will be that a larger group of persons will be appointed after a selection process in line with the importance of the function and more individuals may therefore be held personally responsible beyond those currently covered under the AFS.

The regulators will not approve and vet Affected Staff with respect to suitability itself, but will instead require banks to (initially and annually) assess and certify that Affected Staff members are suitable and ethical to carry out their functions.

The regulator will monitor how the vetting process has been undertaken by the bank and will vet Affected Staff on integrity after the bank has assessed the integrity of the Affected Staff. The additional vetting of the integrity by the regulator is considered necessary by the government. Although it is the responsibility of the bank to assess the integrity and suitability of the Affected Staff, the regulators (DNB and AFM) have access to relevant information (such as the regulatory incidents register and criminal records) that is not available to the bank and will therefore address these aspects. A new integrity form is being developed by the regulator for this new group and the regulator will provide further explanation on the requirements for financial undertakings in January 2015.

The standard of suitability expected from Affected Staff will be broadly similar to that of approved persons as set out in the policy rule of DCB and AFM ("Beleidsregel geschiktheid 2012"). However, it is the responsibility of banks to determine the respective standards per relevant individual function. These individuals are also obliged to take an oath (see below).

Scope: all staff of banks

The new Rules of Conduct, oath and disciplinary rules set out the standards of behaviour for all employees from an Executive Board member down to the trainee working for a bank. They will apply to everyone. Although during the discussions in parliament it appeared that an exception for a few designated categories of staff such as receptionists, caterers, security guards and cleaners might be introduced, the final text of the law does not explicitly refer to these exceptions for those directly employed by the bank. It is therefore currently unclear whether such categories of staff can be exempted.

The Rules of Conduct will become applicable upon taking the oath. This is a significant change as all staff will potentially be subject to enforcement action by a disciplinary committee for breaches of the Rules of Conduct. To make this possible, banks have to set up a disciplinary framework and the employees have to consent to this framework by signing a statement. The disciplinary rules must provide adequate safeguards for due process and be applied and implemented by an independent and external disciplinary board, the Dutch Securities Institute. The extension of the suitability and integrity requirement, according to the amendments to articles 3:8 and 3:9 of the AFS, applies to all staff working for a bank established in the Netherlands, who have a managerial function right below the Executive Board and are responsible for natural persons who perform activities that can have a significant impact on the risk profile of the bank.

For banks, the oath will be mandatory for all employees who have an employment contract or perform activities that form part of or are related to banking business, or otherwise form a significant part of the banking processes supporting the banking business.

The suitability and integrity requirement as well as the requirement to take an oath and comply with the Rules of Conduct apply to employees working in the Netherlands of banks established in the Netherlands and employees working at branches in the Netherlands of banks established in a non-member state.

Extension to insurers and other firms

For Executive Board members of insurance companies, clearing and settlement institutions, payments institutions, electronic money institutions, risk-acceptance entities and premium pension institutions, the requirements remain unchanged.

The above mentioned amendment of the AFS introduces suitability and integrity requirements as of 1 April 2015 not only for banks but also for "managers right below the level of the Executive Board that have final responsibility for activities of employees that can have a significant impact on the risk profile of (banks and) insurance companies" (articles 3:8 sub 1 and 3:9 sub 1 AFS). The same principles and policies for vetting as explained above for banks will apply to insurance companies.

The requirement to take an oath is also required for employees of insurance companies, clearing and settlement institutions, payments institutions, electronic money institutions, risk-acceptance entities and premium pension institutions, however, only in so far as their activities influence the risk profile of the financial undertaking or they are directly involved in the provision of financial services to clients.

Timetable

The approved amendments to the AFS of 19 November 2014 have been entered in the Bulletin of Acts and Decrees on 5 December 2014.The articles with respect to the extended suitability and integrity requirement, the requirement to take the bankers' oath and submission to disciplinary rules will enter into force as of 1 April 2015, according to the Decree of 11 December 2014 which was published on 24 December 2014.

New employees, hired after 1 April 2015, have to take the bankers' oath within 3 months after starting their activities. For the disciplinary regime no statutory period is determined. The disciplinary rulesapply as of the date that the bankers' oath has been taken by the employee. For current employees a transitional period of 1 year as of 1 April 2015 has been granted for taking the bankers' oath.

The suitability and integrity requirement for Affected Staff will be applicable as of 1 April 2015.

What’s the impact?

The key impacts on banking staff are:

• far more staff will be covered by the suitability and integrity requirement, bankers' oath and Rules of Conduct than at present;
• both amendments will have a significant impact on employment agreement performance appraisals, as they will result in far more responsibilities and liabilities for employees;
• each designated management staff member needs to be aware of the requirement for suitability and integrity and the criteria determined by the bank for compliance with this requirement. Compliance will be tested initially when hiring and subsequently annually by the financial undertaking;
• the Rules of Conduct will apply throughout the firm which means all staff (except ancillary staff such as cleaners, security guards etc.) will be required to act with integrity and competence, treat customers fairly and act in their interests by simultaneously taking into account the interests of all other stakeholders (i.e. the financial undertaking, the shareholders, other creditors and the society);
• all employees now have an individual responsibility to comply with the applicable legislation and regulation and internal policy and procedures relevant for their function;
• as individual accountability has been anchored for all banking staff by way of a disciplinary regime, each employee needs to be aware what these Rules of Conduct mean for his/her day-to-day business. In particular, employees need to be familiar with the applicable legislation, regulation, internal policies and procedures. They also need to be aware of how to act in the event of a conflict of interest. Merely acting in compliance with internal policies and procedures only or acting on instructions of managers only will not suffice if this will result in a breach of the Rules of Conduct or lead to a conflict of interest;
• employees should also be aware that they will need to provide proof in the event of a disciplinary claim that they have acted in compliance with the conduct rules and that they might need independent legal representation (in the event of a conflict of interest with the bank).

The key impacts on banks are:

• Banks need to assess and determine which functions are to be considered within the scope of the extended group to whom the suitability and integrity requirement will apply and should develop a policy. They also need to develop standards that will apply for the relevant functions;
• Banks need to vet the integrity and suitability of new applicants themselves before hiring, based on the standards that they have determined for the specific function;
• Existing staff working in relevant functions of banks have to be vetted for integrity and suitability on a regular basis.
• The substantiation of the individual vetting should be documented carefully;
• Policies and procedures should be in place dealing with promotions to these functions in case questions arise regarding the suitability or integrity of an individual upon pre-appointment or recurring vetting. Furthermore, the policies should impose an obligation upon the employee to inform the compliance function of the employer of any issue that could raise questions about his/her suitability or integrity.
• With respect to the banking oath, the Rules of Conduct and the disciplinary regime, banks will need to train staff in awareness and make sure that staff are fully aware of their responsibilities as a consequence of the Rules of Conduct. Depending on the relevant function, banks may run tailored training programmes;
• As the disciplinary rules are based on private law, banks will need to amend the employment agreements of all staff and have them take the oath and sign their consent to the disciplinary regime; Banks should also be aware of how to deal with employees who refuse to take the oath or to give their consent with respect to the disciplinary regime or with employees who are only willing to sign conditionally.

Key impacts on insurance companies and their staff are:

The impacts described above for banks in relation to the extension of the requirements for suitability and integrity for certain bank employees also apply to insurance companies. The impact of the requirement to swear the oath will be described hereunder.

• far more staff will be covered by the requirement to swear the oath, namely in so far as their activities influence the risk profile of the financial undertaking or are directly involved in the provision of financial services to clients;
• Insurance companies therefore need to assess and determine which staff are affected by the requirement to swear the oath;
• Insurance companies need to review their policies and procedures to ensure that Affected Staff understand the purpose of swearing the oath and the significance of this for them.
• As before, Affected Staff will be required to act with integrity and competence, treat customers fairly and act in their interests by simultaneously taking into account the interests of all other stakeholders (i.e. the financial undertaking, the shareholders, other creditors and the society) and to comply with all laws and regulations;
• Although a disciplinary framework will not apply to these employees, failure to comply with the oath without good reason may also have consequences for individuals. The regulators (AFM and DNB) will perform risk based monitoring to ensure that insurers have implemented the oath requirement for Affected Staff. In case of noncompliance the regulators can impose sanctions on the insurer. Such a sanction will also qualify as a regulatory incident, which will be registered in the name of the non-complying employee and thus jeopardize the employee’s future appointments in the financial industry. Furthermore, refusal to take the oath will be a reason to dissolve the employment agreement on the grounds that the employee is no longer considered to be suitable for the function.

The main challenges facing firms can therefore be summarised as follows:

• The need to identify all Affected Staff. This will involve mapping existing functions onto the extended suitability and integrity requirements for banks and insurance companies and onto the extended requirement to swear the oath;
• The need to perform integrity and suitability vetting for all Affected Staff of banks and insurance companies or new applicants for these functions;
• The need to document processes and establish new procedures to enable staff to operate compliantly with the new requirements;
• The need to train staff thoroughly and assure them that they can comply with the new requirements (for banks these are the Rules of Conduct) and, in many cases, personal regulation for the first time; and
• The need to amend all employment agreements to ensure that each relevant individual has taken the oath and that all banking staff have also consented to the disciplinary regime.