Periodically, one of our legal consultants briefly discusses a relevant supervisory decision of the Dutch Authority for the Financial Markets (AFM), the Dutch Central Bank (DNB) or the Dutch Data Protection Authority (AP). This is always done by asking the same three questions and in plain language so that the issue is easily understood by the non-lawyers among us.
This time, Gerard Jong reflects on a ruling by the preliminary relief judge of the District Court of Rotterdam issued on 9 February 2021 and a ruling of the District Court of Rotterdam issued on 16 September 2022. Both deal with the reassessment of propriety by the DNB and were published on 17 February 2023.
The two claimants in these cases are former day-to-day policymakers of a financial enterprise. The DNB had granted each of them a “declaration of no objection” (DNO) for holding at least a 10% interest in that company and an affiliated financial undertaking. The propriety of DNO holders must always be beyond doubt. If at any time the DNB establishes there is reasonable cause to reassess that propriety, it will do so.
In this instance, the DNB observed that cause in an order subject to penalty that the AFM had previously imposed on the financial enterprise, among other indications. According to that enforcement decision, there had been many violations of the financial laws and regulations. The AFM also intended to impose an administrative fine on the claimants for effectively overseeing the violation of the Financial Supervision Act (abbreviated as Wft in Dutch). However, the AFM subsequently did not follow through on its intention — not because it reconsidered its negative propriety assessment of the claimants, but because it no longer considered it appropriate. Further, in response to observed infringements of financial laws and regulations, the AFM sent instructive letters on compliance with standards to the financial enterprise.
Did the DNB conclude, on valid grounds, that the propriety of the claimants was no longer beyond doubt?
On 20 January 2020, the DNB issued directions to both claimants, stating that they must reduce their equity interest in the affiliated enterprise to less than 10% within six months (the compliance period). In its decisions on objections dated 10 November 2020, the DNB declared the objections against these directions to be unfounded. The claimants then lodged an appeal against these decisions with the District Court of Rotterdam. The preliminary relief judge of that court was requested to grant a preliminary relief focused on extending the compliance period until the date when the court would issue its ruling.
The ruling of the preliminary relief judge spoke of a “complex case”. The court’s ruling revealed that in assessing this case, a great deal of consideration had also been given to many procedural points of dispute, some of which stemmed from the applicable General Administrative Law Act (Awb in Dutch).
For example, the court addressed:
- the documents relating to the case;
- the scope of the grounds for appeal;
- the DNB’s board of appeal and its composition; and
- the scope of the reassessment.
Given the nature of this publication, however, the discussion that follows will exclusively address the core of the dispute: Did the DNB conclude, on valid grounds, that the propriety of the claimants was no longer beyond doubt?
On 20 January 2020, the DNB issued directions to both claimants, stating that they must reduce their equity interest in the affiliated enterprise to less than 10% within six months (the compliance period). In its decisions on objections dated 10 November 2020, the DNB declared the objections against these directions to be unfounded. The claimants then lodged an appeal against these decisions with the District Court of Rotterdam. The preliminary relief judge of that court was requested to grant a preliminary relief focused on extending the compliance period until the date when the court would issue its ruling.
The ruling of the preliminary relief judge spoke of a “complex case”. The court’s ruling revealed that in assessing this case, a great deal of consideration had also been given to many procedural points of dispute, some of which stemmed from the applicable General Administrative Law Act (Awb in Dutch).
For example, the court addressed:
Given the nature of this publication, however, the discussion that follows will exclusively address the core of the dispute: Did the DNB conclude, on valid grounds, that the propriety of the claimants was no longer beyond doubt?
The role of the preliminary relief judge was to decide whether cause existed to grant the requested preliminary relief. The decision would be based on the interests of the claimants and the interests that the Wft aims to protect. According to the preliminary relief judge, the claimants had a significant interest in receiving preliminary relief. The forced transfer of part of their shares constituted an infringement on their fundamental right to own property. The preliminary relief judge believed that such a transfer would also be difficult to effect and later reverse under reasonable conditions should there be a revocation of the DNB directions in the proceedings on the merits before the court. Moreover, any damage that the claimants incurred as a result would be difficult or impossible to recover from the DNB.
The Wft aims to protect the interest that the propriety of DNO holders is always beyond doubt. That interest precludes individuals whose propriety is no longer beyond doubt still having a policymaking role in a financial enterprise. However, the preliminary relief judge noted that a significant amount of time had passed from the moment the DNB determined there was reasonable cause for reassessment (21 August 2018) to the moment the contested directions were issued (20 January 2020). Given the long period of time the DNB had taken for its decision-making, the preliminary relief judge found no reason to have the forced share transfer carried out now at short notice. This could await the outcome of the proceedings on the merits.
The preliminary relief judge concluded that the interests of the claimants in granting their requests for preliminary relief outweighed the interests of the DNB in the refusal thereof. The preliminary judge therefore granted these requests with no opportunity for appeal and ordered the DNB to pay the legal costs.
In its ruling, the court arrived at the following conclusion.
The AFM’s intended decisions and instructive letters on compliance with standards are supervisory antecedents, other facts and circumstances or other antecedents such as those stated in the Decree on Prudential Rules for Financial Undertakings under the Wft. On that basis, the DNB could reasonably proceed to reassessment of the claimants’ propriety.
The fact that the policymakers did not commit any criminal offences was no reason to rule that only their fitness could be reassessed. The DNB was compelled to independently assess and weigh these antecedents and other facts and circumstances. In the propriety assessment, the DNB had to consider the proper weight of each antecedent.
The DNB has some discretion when determining whether propriety is not or is no longer beyond doubt. This discretion does not apply to its investigation into the relevant facts. For this, the DNB may, in principle, rely on the expertise of the AFM. However, the DNB does need to verify whether the AFM has performed its investigation carefully. The DNB had met this requirement by adding investigative reports and other correspondence from the AFM to its files and asking further questions of the AFM in response to the claimants’ positions.
It is notable that the court, in view of the legal protection to which the claimants are entitled, went further in its assessment than is required of the DNB in the objection stage under the Awb.
In its consideration of the order subject to penalty as a supervisory antecedent, the court concluded that:
In weighing the other antecedents, the court held that (i) they were less serious than the DNB assumed, (ii) they had been unjustly considered antecedents or (iii) they were not of such a nature that they should be included in the reassessment.
While the intended fine did provide an antecedent, it contributed nothing substantive to the violations that had already been deemed antecedents.
A total of six antecedents were omitted before the court or given less significance than the DNB had assumed. The court subsequently nullified the contested decisions on objections and ordered the DNB to take two new decisions on objections within twelve weeks, in observance of its ruling.
Along with this order, the court gave the DNB the following “guidelines”.
According to the court, when reassessing propriety, the administrative body tasked with determining and weighing the antecedents must use high standards. This is because of the possible negative consequences: a person can lose all or part of their shares and position. The claimants stated before the court that they were, in fact, disqualified from working in their profession — they were no longer able to work in the financial sector due to their negative propriety assessment.
What is also striking is that both the DNB and the Dutch government (the Minister of Justice and Security) were ordered to pay (modest) non-pecuniary damages to the claimants and to pay for their legal costs.
Additionally, in the published ruling, it appears that the DNB did not lodge an appeal with the Trade and Industry Appeals Tribunal. In its new decisions on objections, the DNB concluded that there were insufficient grounds for upholding the negative propriety assessment of the claimants. It therefore withdrew the decisions that included this assessment.
The propriety requirement for policymakers and DNO holders is still very important.
On the one hand, these rulings teach us that the propriety requirement for financial enterprise policymakers and DNO holders is still very important. According to the court, those enterprises are required to regularly audit their own organisation to identify integrity risks. They must also formulate appropriate policy and modify it as required to permanently safeguard sound business conduct. The court determined that day-to-day policymakers are “fully responsible” for any violations occurring under their management. This may therefore impact the assessment or reassessment of their propriety.
On the other hand, these rulings teach us that high standards are set for the determination and weighing of antecedents and the ensuing decision-making carried out by administrative bodies such as the AFM and the DNB. It must be evident from their enforcement decisions that they have taken this into account in all respects in a proper and clear manner. This is understandable given the far-reaching repercussions of a negative propriety assessment. In this specific instance, the court concluded that those high standards were not satisfied, after which the DNB reconsidered its previously held positions.
We can assume that, from now on, the AFM and the DNB will adopt the principles and guidelines stated in this case as a starting point, both in their initial propriety assessments and in reassessments of propriety if reasonable cause exists to do so.
