Dutch CRD IV Implementation Act Published

On 22 January 2014 the Dutch Ministry of Finance and Ministry of National Security and Justice published the co-signed proposal for Implementation of Directive 2013/36/EU ("CRD IV") and Regulation (EU) No 575/2013 ("CRR"), hereinafter: "Dutch CRD IV Implementation Act"). With the publication of this proposal the Dutch legislator has taken the first step to transpose the provisions of CRD IV to the Dutch legislative environment. Further proposals will follow to amend lower laws (Governmental Decrees) to adapt these to the European CRD IV and CRR body of law.

Earlier Dutch law adaption to CRR and CRD IV

Earlier in 2013, the Dutch legislator had made alterations to the body of Dutch legislation to ensure proper adaption of Dutch law to the directly binding CRR-provisions. The relevant changes ensured the proper mandating of the Dutch Central Bank ("DCB") that is the competent authority in the Netherlands to enforce the CRR provisions applicable for banks and investment firms. The relevant Governmental Decrees of 26 November and 6 December 2013 entered into force as from 1 January 2014.

With this earlier amendment to Dutch law by means of the Decrees and a few provisions of the Dutch Act on Financial Supervision ("AFS"), the substantive body of rules introduced with CRR became applicable in the Netherlands and enforceable by DCB. Clarity was given which sanctions regime (particularly with respect to fines and instructions enforced with penalties) would be applicable as regards CRR provisions and there was introduction of rules for systemically important banks and investment firms.

The Dutch CRD IV Implementation Act does provide for rules on certain ancillary topics of prudential law introduced with CRD IV that are required to be adapted to the Dutch law environment. However, many Dutch law provisions dealing with topics covered in the former CRD I, CRD II and CRD III directives had already been transposed to Dutch law in earlier years. Consequentially, many prudential law provisions of Dutch law for banks and investment firms will remain unaffected by the Dutch CRD IV Implementation Act, even if certain topics are covered in CRD IV.

The most significant impact as regards the new regime introduced by CRR was seen at the level of the technical and operational rules issued by DCB to implement the Basel II accord (transposed in Europe in CRD I) in 2007. Most of these regulator rules have been cancelled, effective 1 January 2014, as the substantive body of solvency and capital adequacy regulations for banks and investment firms is, henceforth, regulated at the level of CRR.

DCB published its "Regulation specific provisions CRD IV and CRR" on 9 December 2013, dealing, particularly, with the practical implications of the applicable CRR-provisions in supervisory practice. For instance this DCB Regulation regulates the procedure on the regulatory clearance of the Core Equity Tier 1 ("CET1") within the meaning of article 50 CRR, Additional Tier 1 capital instruments ("AT1") capital instruments within the meaning of article 52 CRR and Tier 2 capital instruments within the meaning of article 63 CRR that banks and investment firms wish to issue as from 1 January 2014.

Single Rule Book turned into a reality

The Netherlands has adopted the so-called 'Twin Peaks' supervisory model in 2002 making clear distinctions throughout all sectors of the financial industry between prudential supervision and market conduct supervision. The Dutch AFS, that became applicable in 2007, overhauled the sectorial approach with respect to legislation that existed until the introduction of the Twin Peaks supervisory model. The new organisation of the supervision of financial companies resulted into separation of tasks of the DCB being the competent authority for prudential supervision and the Authority Financial Markets ("AFM") being the competent authority for market conduct supervision.

With the introduction of the AFS another core principle of the organisation of Dutch supervision was implemented, being the separation of tasks and responsibilities of regulators supervising and sanctioning rules and regulations on the one hand, and the powers of the legislator to adopt rules and regulations on the other hand. This, among other things, resulted into a transfer of significant parts of the supervisory laws to the level of the Dutch legislator. In this model Dutch Parliament adopts the high level statutory provisions upon proposals of the Government and the Government adopts lower level rules and regulations acting upon delegated powers contained in the body of statutory law. Supervisory rules and regulations issued directly from the two regulatory authorities, being DCB and the AFM should be reduced to the minimum extent possible.

Tension on this model occurred already in 2007 with the transposition of the capital adequacy and solvency supervision provisions of the CRD I directive of 2006 in Dutch law. Many of these provisions, if not substantially all, had been laid down at the level of rules and regulations adopted by DCB based on delegated powers in the general body of law. CRD I rules had, therefore, in many respects found their way in different levels of the Dutch body of law, being the primary statutory acts of Dutch Parliament, the Governmental Decrees and a significant volume of rules and regulations of DCB.

In the CRD IV era, the Netherlands is confronted again with a very significant shift in the organisation of the body of laws and regulations applicable to banks and investment firms. Firstly, the direct application of CRR has a very significant impact on the rule making authority of DCB, resulting into a automatic cancellation of hundreds of pages of DCB regulations with effect from 1 January 2014. Secondly, DCB has less room for interpretation of the rules applicable to banks and investment firms as set forth in CRR. Options and discretions are only exercisable by regulated companies, if CRR explicitly permits such exercise. The possibility of 'national' solutions as they have been created in the past by means of interpretative rulings from DCB of the CRD I provisions will be reduced significantly.

This change is consistent with the objectives of the European legislator, where the adoption of CRR and CRD IV is one of the foundations towards the implementation of the Single Rule Book removing national discretions and interpretations to the maximum extent possible. This fundamental change is at risk to be underestimated by the market. Larger international businesses may welcome the idea of the creation of a consistent body of law applicable to regulated banks and investment firms wherever they do business in Europe. Smaller institutions with little international orientation may resent the fact that they cannot rely on the interpretations and guidance of the domestic regulator any longer.

DCB has been very helpful in providing guidance as regards to this fundamental change by organising late 2013 bespoke conferences for regulated businesses and issuing supportive information documents. Nevertheless, there is much more work to do to get truly acquainted with the new regulatory environment that stems from the fact that the majority of the rules for prudential supervision of banks and investment firms are no longer to be found in the domestic Dutch law environment.

Fundamentally, the choices made by the European legislator to set forth the majority of prudential law provisions at the level of a direct binding regulation (CRR) on the one hand, but leaving certain topics at the level of a directive (CRD IV) on the other hand may contribute to further constraints in this respect. One could ask the question whether it would have made more sense that a number of topics now regulated at the level of CRD IV should rather have been comprised in the CRR regulation in order to create more transparent and consistent laws.

Dutch CRD IV Implementation Act

The Dutch CRD IV Implementation Act will change two hundred ten (210) provisions of the framework AFS act, counting the changes at the level of core provisions and sub-paragraphs and including the provisions removed from the AFS as a result of CRD IV and CRR. Surprisingly, only 44 provisions are completely new to the Dutch AFS. Mostly, provisions contained in the AFS will be amended to adapt to the language of the CRD IV directive. Hereinafter, we will highlight some of the most significant changes to Dutch law as a result of the Dutch CRD IV Implementation Act.

Prudential consolidation

Significant parts of the AFS provisions regulating the subject matter of supervision on consolidated basis will be removed from the AFS, in view of the direct binding effect of the CRR provisions contained in Part 1, Chapter 2 CRR on "Prudential consolidation". This subject matter demonstrates how the choices of the European legislator significantly impact the construction of the body of law. CRR provisions on prudential consolidation required the Dutch legislator to remove, particularly, the scope of application provisions from the Dutch AFS. However, other provisions, particularly the regulation of the competence and duties of the DCB in respect of supervising groups of banks and investment firms, remain to be a subject matter of Dutch law. Moreover, the provisions of articles 111 et seq. CRD IV on the "Principles for conducting supervision on a consolidated basis" are required to be transposed in national law, leaving the relevant parts in Dutch law (stemming from the original CRD I directive that already dealt with these principles) intact. The end result of this implementation looks like a Swiss cheese with many holes in the AFS of provisions removed on the one hand, where other provisions on the same topic remain to be in place or are slightly amended on the other hand.

Capital buffers

Completely new to the Dutch AFS are the provisions implementing Title VII, Chapter 4 regulating the subject matter of Capital buffers. The core provisions are to be found in articles 3:62a and 3:62b AFS regulating a generic regime for additional capital buffers. The intention is to lay down detailed rules on the determination of capital buffers at the level of a Governmental Decree (amending the current Decree on prudential supervision AFS) in which the delegated authority of the DCB will be set forth to impose capital buffers on an individual bank or investment firm. The amendments that this Governmental Decree will bring are yet to be published by the Ministry of Finance. However, due to political pressures exercised in 2013, the Dutch legislator already implemented the regime of buffers for systemically important institutions as set out in article 131 et seq. CRD IV. The particular detailed rules on this subject matter may be found in the new provisions of Chapter 10A of the Decree prudential supervision AFS. For the determination whether a bank or investment firm qualifies as a global systemically important institution ("G-SII") the Dutch Decree provisions refer to the criteria laid down in article 131, second paragraph CRD IV.

For other systemically important banks and investment firms ("O-SII"), the criteria are determined in article 105c, paragraph 1(b) Decree prudential supervision AFS. These criteria are, however, more or less identical to the ones referred to in 131, second paragraph CRD IV for G-SII's and deviate, therefore from the criteria set out in paragraph 3 of article 131 CRD IV in which the European directive provisions for O-SII's are given. Furthermore, Dutch law also defines the criterion of impact of 'behaviour of an institution' on the 'behaviour of other parties' activity on the financial markets' as an indicator for being systemically important. With this provision the Dutch regulator seeks to address the requirement of a 'chain reaction' causing the systemic risk as one of the justifications to impose higher capital buffers to the institution concerned.

The transitional provisions of Dutch law for the G-SII and O-SII capital buffers suggest a phased introduction in four steps in a four years period commencing 2016 (25% requirement), 2017 (50%), 2018 (75%) and 2019 (100%).

The further details of the rules for capital buffers are to be contained in the amendment to the Decree prudential supervision AFS and are likely to be known after the publication of a consultation document on this subject matter in February 2014.

Capital conservation measures

Perhaps one of the most significant changes the CRR and CRD IV rules bring, concerns the measures concerning the conservation of (regulatory) capital by regulated banks and investment firms. This topic may also be seen as one of the clear examples where direct binding CRR provisions imposed on the regulated firms concerned, must be read in conjunction with national statutory provisions that supplement the CRR rules to a great extent.

In order to implement the provisions of article 141 CRD IV addressing 'Restrictions on distributions', the Dutch CRD IV Implementation Act introduces two new provisions to the AFS. The first provision is laid down in a new article 3:62b AFS, prohibiting in paragraph 1 the regulated firm to make 'distributions insofar as these distributions would affect the level of capital as regulated in article 50 CRR resulting into the firm no longer meeting the combined capital buffer requirements.

Paragraph 2 of the new article 3:62b AFS partially deals with the regime of article 141 paragraph 2 CRD IV regulating the requirements if a firm does not meet or exceed the combined capital buffer requirements. As follows from the provisions of article 141 CRD IV, a firm not meeting or exceeding the combined capital buffer requirements, shall firstly draw up a plan specifying the so-called 'Maximum Distributable Amount' ("MDA") and this plan must be submitted to the competent authority. Based on the calculated MDA, the competent authority shall take a decision as to whether or not (i) distributions on CET1 instruments, (ii) creation of new or honouring of existing obligations to pay variable remuneration or discretionary pension benefits and (iii) payments on AT1 instruments.

MDA calculations as they are imposed on the firm concerned are based on complex formulae set forth in paragraphs 4 et seq. of article 141 CRD IV. The relevant provisions of the CRDIV are, however, not included in the Dutch CRD IV Implementation Act that refers to a regulation to be included in the Decree prudential supervision AFS. This choice to set out more detailed and technical regulations in the lower law provisions at the level of a Governmental Decree has its advantages.

The detailed rules may be subject to change in the future and by setting them forth at a level of a Governmental Decree, the legislator keeps more flexibility to adapt to changes. By implementing this procedure, the Dutch legislator does not need to involve Dutch Parliament formally when making future adaptions to address new developments. Obviously, the manner of regulating the subject matter of capital conservation requires careful reading of all the provisions concerned and at all levels.

A second new provision introduced with the Dutch CRD IV Implementation Act concerns the amendment to the provision of article 3:96 AFS regulating the so-called 'declaration of no-objection' regime for certain financial, legal or organisational reorganisation measures taken by regulated banks. This particular amendment endorses the principles of non-distribution as set out in article 28, first paragraph, (f) under (ii) CRR on the repayment of the principal amount of CET1 capital instruments.

The subject matter introduced in the revised AFS provision, determines that a bank must, at all times, obtain a so-called declaration of no-objection from DCB if it wishes to redeem or otherwise repay capital instruments within the meaning of article 26 CRR. By the implementation of this provision, the Dutch legislator aims at ensuring that any discussions about the direct binding effect of the CRR provisions as regards the relation between a regulated firm and its shareholders (or in rare cases where CET1 instruments are shaped in the form of debt obligations) are prevented by this regulation at the level of the Dutch AFS. This rule must be placed in the context of "better safe than sorry" behaviour of the Dutch legislator for all cases where the regulated firm would have discussions with its shareholders or bondholders about the exercise of corporate law or contractual rights concerning distribution of capital or repayment of debt. The firm will, as a result of this provision of mandatory of law, be prohibited to do so, notwithstanding any deviating clauses or provisions of corporate law or contractual arrangements. It is our view that the same results could have been achieved by application of the provisions of article 28 CRR.

Intervention measures

As has been the case in the era of application of CRD I, the provisions of CRD IV contain a set of rules regulating the very first phase of external intervention with regulated banks and investment firms. This first line of measures can be taken in cases where the competent authority is concerned with the developments with the regulated firm and desires to impose instructions for the change of certain business organisational aspects or funding plans of the firm.

The Dutch CRD IV Implementation Act brings fundamental changes to the legacy provisions adopted to implement the CRD I rules in respect of intervention by the DCB with banks and investment firms. The old provision has been applied, among other non-disclosed cases, in the context of the early intervention measures imposed by DCB prior to the nationalisation of the significant SNS-Reaal banking and insurance group.

The most significant additions to the Dutch AFS provision (implementing particularly the provision of article 104 CRD IV) concern measure: (i) requiring the firm concerned to reduce the risk inherent in the activities, products and systems, (ii) to restrict or prohibit distributions or interest payments by an institution to shareholders, members or holders of AT1 capital instruments (where the prohibition does not constitute an event of default of the firm concerned); (iii) to limit variable remuneration as a percentage of net revenues of the firm where payment of variable remuneration would be inconsistent with the maintenance of a sound capital base; (iv) requiring additional or more frequent reporting requirements (or requiring supplemental information on developments in solvency or liquidity).

In addition of required elements to the current AFS following form the transposition of article 104 CRD IV, the Dutch legislator has introduced some additional changes in the context of the early intervention measures. These further rules concern, among others, the (i) imposing of additional liquidity management rules, particularly related to address the mismatch of duration of available and required liquidity and (ii) the possibility of presence of officers of DCB at the premises of the firm concerned to intensify the supervision.

Concluding remarks

We have only been able to highlight the most significant changes to the AFS as proposed in the Dutch CRD IV Implementation Act. We have not addressed other significant changes, particularly: (i) the expected overhaul of the Dutch sanctions regime (including the 'naming and shaming' publication provisions upon imposing sanctions to firms), (ii) the significant changes on the provision on co-operation between (international) competent authorities, (iii) the adaption of certain provisions of liquidity management which anticipate on the CRR regime on liquidity management (particularly the provisions on 'Liquidity Coverage Ratio') that will be introduced in the near future, (iv) changes to the provisions on the ICAAP and SREP processes and the introduction on requirements to establish recovery plans and (v) introduction of the regime for sharing confidential information as concerns supervisory actions with special audit committees of Dutch Parliament.

In conclusion, the Dutch CRD IV Implementation Act brings very significant changes to the Dutch prudential law provisions. Further detailed and elaborate regulations are expected with the adaption of the Governmental Decree amending the Decree prudential supervision AFS. These amendments will be published as a consultation document soon.

The desired date of entry into force of the Dutch CRD IV Implementation Act is 1 July 2014. In view of the recent debate in Dutch Parliament at the occasion of the singled out introduction of capital buffer requirements for systemically important institutions, intensive debates in Dutch Parliament may, however, be expected. This may result in delays in the final adoption of this very significant change to the Dutch AFS.