New Supervision Regime for Finance Companies - International Law Office

New Act on Financial Supervision
Finance Companies in the Netherlands

New Act on Financial Supervision

As of January 1 2007 the legislation on the system of financial supervision in the Netherlands has undergone a drastic change. The introduction of the Financial Supervision Act is the result of a major operation which - save for the introduction of Books 3, 5 and 6 of the New Civil Code in 1992 - constitutes the largest legislation reform in the Netherlands since World War II. The new act combines eight supervisory laws into one act. The following acts, among others, have been repealed:

• the Act on the Supervision of the Securities Trade 1995;
  
  
• the Act on the Supervision of the Credit System 1992;
  
  
• the Act on the Supervision of Insurance Business 1993; and
  
  
• the Act on the Supervision of Institutions for Collective Investment.

The new act implements a new system of supervision. The former legislative system was based on sectoral supervision, whereby the Netherlands Central Bank exercised supervision over banks, insurance companies and institutions for collective investment, among other things. The Netherlands Authority for the Financial Markets was the competent supervisory authority for securities intermediaries, portfolio managers and securities-issuing institutions.

The new legislative system (as laid down in the act) is based on functional supervision. The Central Bank is in charge of prudential supervision, while the authority exercises market conduct supervision. Prudential supervision focuses on the financial solidity of financial enterprises and their contribution to the stability of the financial sector as a whole. Market conduct supervision focuses on orderly and transparent market procedures, clear relationships between market participants and the proper treatment of clients in the financial sector.

Although the tasks of both the Central Bank and the authority are strictly defined, this still means that two supervisory authorities are active in the same financial sector. To avoid overlap, the text of the act entrusts as much as possible one supervisory authority with the responsibility to decide on certain matters. Only one authority will be allowed to grant licences to financial enterprises wishing to access the market, even though the assessment of licences includes aspects of both prudential and market supervision. The Central Bank will grant licences to banks and insurance companies, while the authority will grant licences to securities intermediaries and institutions for collective investments. Both supervisory authorities will cooperate during the procedure leading to the granting of the licence.

The act does not aim to revise the substantive norms of the law, but certain changes are of interest to market participants. This update provides a brief overview of the banking rules and the position of finance companies in the Netherlands.

Finance Companies in the Netherlands

General description
Approximately 7,000 finance companies are operating in the Netherlands. Finance companies typically attract repayable funds and use the funds for on-lending to group companies or third parties outside the group, and/or to make investments for their own account. Several multinationals use Dutch finance companies to obtain funds through borrowed capital and use finance companies as an internal bank.

Former regime
Pursuant to the former Act on the Supervision of the Credit System, finance companies fell within the definition of 'credit institutions' and, in principle, needed a banking licence. Exemptions were available under the Exemption Regulation promulgated under the act. Finance companies that restricted their activities to the attraction of repayable funds from professional market participants and/or within one restricted circle (as defined in a decree promulgated pursuant to the act) benefited from an exemption pursuant to Section 2 of the regulation. Finance companies that attracted repayable funds from the public benefited from an exemption pursuant to Section 3 of the regulation where certain conditions regarding security for the repayment of the loan were met.

As part of the fight against terrorism and money-laundering, finance companies had to register with the Central Bank, thereby providing data on their management, their supervisory bodies and the scope of their activities; such information had to be updated as and when changes occurred.

New regime
Attracting repayable funds from professional market participants and/or within a restricted circle
The definition of 'bank' under Section 2:11 of the new act has been reformulated; therefore, finance companies that attract monies only from professional market participants or within a restricted circle no longer fall within the definition. Such finance companies are free to attract repayable funds and on-lend those funds to third parties. This update does not discuss the definition of 'professional market participants' or 'restricted circle' further. The definition of 'bank' under the act does not include the making of investments for one's own account.

A finance company wishing to fall outside the scope of the definition of 'bank' should ascertain as precisely as reasonably possible that its lenders qualify as professional market participants. Such investigation shall typically include a check of registers in which professional market participants are recorded. If a lender declares that it has the status of professional market participant, the borrower may trust that information unless it knows or reasonably ought to know that the lender's declaration is incorrect. Where a party qualified as professional market participant at the time of attraction of the funds, it is deemed to continue to be a professional market participant for the duration of the irrevocable facilities and funds already provided. Therefore, when a lender ceases to qualify as professional market participant after the conclusion of a loan, it cannot invoke that circumstance to argue that the borrower has acted in violation of the legal requirements.

Attracting funds repayable from the public
Finance companies that attract repayable funds from the public (ie, not only from professional market participants and/or within a restricted circle) fall within the definition of 'bank' under the new act. Under certain conditions set forth in Section 3:2 of the act, finance companies are exempt from supervision when attracting repayable funds from the public. Those conditions include the following:

• The attraction of repayable funds should be made through the issuance of transferable securities and all requirements under Chapter 5:1 of the act (eg, the requirement to have an approved prospectus available or to benefit from an exception or exemption) should be met;
  
  
• The finance company should provide security for the repayment of the loan through, among other things, a parental guarantee, a keep-well agreement or a security issued by a licensed bank; and
  
  
• The finance company should on-lend the repayable funds obtained up to at least 95% of its balance sheet total to companies belonging to the group of companies to which it belongs.

There is hardly any material change compared to the Act on the Supervision of the Credit System 1992.

Transferable securities
As a result of the rewording of Section 3:2 of the new act (compared with Section 3 of the Exemption Regulation) and the new definition of 'securities' in Section 1:1 (compared with the Act on the Supervision of the Securities Trade 1995), a finance company that attracts repayable funds from the public through the issuance of non-transferable money-market instruments or non-transferable debt instruments cannot make use of Section 3:2 of the new act and thus falls within the scope of the banking regulations. Such non-transferable instruments do not fall within the definition of 'securities' under Section 1:1 of the act. Certain transitional provisions (Section 60 of the Act on the Introduction and Adjustment of the Financial Supervision Act) stipulate that such finance companies can make use of the regulation set forth in Section 3:2 of the new act for a maximum period of one year, unless the securities are issued pursuant to an agreement for a duration longer than one year, in which case Section 3:2 shall apply until the end of the relevant agreement. This may give finance companies the possibility to change the manner in which they attract repayable funds.

Registration requirement
The registration requirement for finance companies no longer exists. Consequently, a finance company that complies with the rules under the act can operate in the Netherlands without supervision and/or registration for the purpose of the banking legislation. However, other regulations may apply to the business of a particular finance company (eg, registration of international funds transfer for statistical purposes).

Voluntary supervision
Under the new act, finance companies that solely attract repayable funds from professional market participants and/or within a restricted circle and on-lend those monies for their own account, and/or finance companies that attract repayable funds and use such funds to make investments for their own account, may now voluntarily apply (under Section 3:4) for a banking licence covering those activities (it is not a full banking licence, as it covers only borrowing and on-lending/investment activities). This possibility has been introduced to enable finance companies to attract repayable funds under better conditions than entities that are not subject to supervision.

For further information on this topic please contact Lous Vervuurt at Bird & Bird by telephone (+31 70 353 8800) or by fax (+31 70 353 8811) or by email (lous.vervuurt@twobirds.com).