Periodically, one of our 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, Paul Schuiling reflects on a ruling by the District Court of Rotterdam. This was handed down in response to a decision by the AFM to impose an administrative fine on a bank because of its alleged violation of Section 81a of the Decree on Conduct of Business Supervision of Financial Undertakings (abbreviated as BGfo in Dutch), which deals with the so-called “single-track interest rate policy”. The ruling was published on 2 September 2022.
In its assessment of the “Mortgage risk premiums dashboard module 2018”, the AFM noted that this bank did not take a customer’s repayments into account in its interest rate offering. This prompted the regulator to conduct a follow-up investigation. Based on this review, the AFM concluded that in 24 of the 25 customer files investigated, no interim repayments or known changes in the value of the home were considered.
In determining the mortgage interest rate, the customer’s risk profile is taken into account. This risk is assessed based on the loan-to-value (LTV) ratio — the size of the mortgage loan relative to the property’s appraised value. In general, the higher the LTV, the higher the interest rate, which is then increased with risk premiums. By considering the repayments made by the customer, a more favourable offer can be made in certain situations because risk premiums then cease to apply.
The law includes a provision that prohibits mortgage lenders from offering existing customers a different interest rate than what they offer new customers, the so-called “single-track interest rate policy”. This aims to prevent using low interest rates to acquire customers who are then, after the end of their fixed-rate period, confronted with higher interest rates.
The AFM argued that banks must consider the repayments they are aware of, as such repayments lower the customer’s risk profile. After all, the interest rate associated with this lower risk profile would also apply to new customers with the same mortgage.
In 24 of the 25 customer files investigated, there was no consideration of interim repayments or known changes in the value of the home.
The court did not agree with this argument and broadened the AFM’s position that repayments made must be considered. In its ruling, the court discussed “taking account of a current LTV”, while the AFM exclusively asked to consider the information known by the bank — in this case, the repayments made.
The court was of the opinion that this does insufficient justice to the comparison between existing and new customers. After all, with new customers, the interest rate is based on the current value of the home. According to the court, this can lead to new and existing customers receiving different interest rate offers while having a similar risk profile.
The court further opined that considering a current LTV could also be to the disadvantage of customers. Because this disadvantage has not played a role in the legislative history, the court assumed that it was never the intention to have mortgage lenders consider the current LTV. According to the court, statements made by the Minister for Housing and the Central Government Sector, in his letters to the Dutch House of Representatives, constitute no part of the legal history of this statutory provision. Even though the minister, in his letter, concurs with the explanation given by the AFM, such statements were disregarded by the court for this reason.
The court held that the appeal was well-founded and that the AFM’s decision to impose a fine must be nullified.
This ruling provides good insight into the workings of the AFM. A less formal query, in this case about a dashboard module, can be a reason for the AFM to conduct a follow-up investigation.
The AFM imposed the fine by its decision of 29 October 2020. After the AFM declared the bank’s objection unfounded, the bank appealed to the court. Appealing can certainly be successful, since financial regulatory legislation is comprehensive and complex. In this case, the AFM argued that mortgage lenders must consider the known repayments. This is then linked to the single-track interest rate policy by the AFM. That the AFM chooses to levy a fine via this “indirect” legal basis is risky.
For financial enterprises it remains important to properly weigh the pros and cons when lodging an appeal. Remember that the appeal process can take a long time. If a fine has become final, it must be published by the AFM. It is therefore also wise to estimate any potential reputational damage.
In some cases, market parties refrain from lodging an appeal out of fear of disrupting their good relationship with the regulator.
In some cases, market parties refrain from lodging an appeal out of fear of disrupting their good relationship with the regulator. Our experience, however, shows that such apprehension is unfounded. While it may seem difficult to do in practice, it is certainly possible to disagree legally without jeopardising a positive rapport. An open and constructive attitude during the investigation and the enforcement process helps to maintain a good relationship.
In this case, the bank successfully referred to the law’s objective. The topic of risk premiums has been in the news for a long time. In an attempt to influence market parties to act correctly, the AFM will have looked for opportunities to enforce desired practices. In this instance, the court decreed that this statutory provision is not intended for that purpose. We must wait and see how certain the AFM is of its standpoint and how much it wants to change this market practice. An appeal to the Trade and Industry Appeals Tribunal is still an option — which means this may not be the last of this case.
