1. Introduction

As of 1 January 2015 new legislation entered into force, which legislation, amongst others tightens the current rules under which group finance companies (“Finco’s”) are exempted from the banking license requirements and prudential supervision of the Dutch Financial Supervision Act (Wet op het financieel toezicht “FSA”). The purpose of the new legislation is to prevent misuse of the exception rules.

According to the Explanatory Memorandum (Memorie van Toelichting), there are two ways in which the exception rules are misused. Firstly, the exception rules are being used by banking groups, where they were never intended to apply to banking groups. Secondly, it has occurred that there are structures in which the requirements for exception are met in a formal legal sense but are effectively misused.

In this newsletter we will first set out the current rules under which a Finco can apply for the exception of the banking license and prudential supervision. In addition, we will also provide some background information as to the origination of the exception for Finco’s. We will then set out the new rules to which a Finco has to comply in order to fall within the scope of the exception. Lastly, we will discuss some elements of the new rules which could be taken into consideration for your business.

2. Previous

Pursuant to section 3:5 FSA, it is prohibited to attract funding from the public without a (banking) license. An exception to this rule is given in section 3:2 FSA. A Finco can attract funding from the public without a (banking) license, if the following conditions are met. Firstly, the attracting of repayable funds (opvorderbare gelden) must take place by issuing (tradeable) bonds, in accordance with the obligation to publish a prospectus. The second condition is that at least 95% of the attracted funds are lent-on or invested within the group. The group is defined as a ‘togetherness’ of a corporation and its subsidiaries. The third condition is that the Finco requires one of the following guarantees for the benefit of the bondholders:

  1. an unconditional guarantee of the parent company;
  2. a keep well agreement between the Finco and the parent company; or
  3. a bank guarantee from a bank registered in an EU member state, an EEA state or an appointed state.

Pursuant to the current section 3:2 paragraph 1 sub A and B FSA, the capital requirement of the parent company that provides a guarantee in line with option 1 or 2, must be positive during the entire term of the guarantee.

It has occurred that the current exception rules can easily be misused. This is the case for example with the guarantee obligations. Under the current rules it is possible to meet the guarantee obligations only ‘on paper’, whilst there is no substantive guarantee. In addition, banking groups can make use of the exception under the current rules by having a Finco without a banking license attracting funds from the public, on-lending it for more than 95% to a group company which in its turn on-lends the funds outside the group. These unwanted side-effects are repaired in the proposed legislation.

3. Tightened Rules

The original exception rules for Finco’s were introduced to facilitate groups of companies in their financing needs. The intention was that a Finco would get the possibility to attract funds from the public by issuing bonds and would lend these funds on within the group in order to finance the daily business of the companies within the group. The public would know to which (group of) companies they would lent their money, making it possible to perform a manageable risk assessment. The new tightened rules intent to narrow down the exception rules to this purpose again.

3.1 Banking groups

The first amendment is that Finco’s that are part of a banking group can no longer make use of the exception of article 3:2 FSA. The current 95% rule is maintained, but a paragraph 4 is added to section 3:2 FSA which stipulates that the exception only applies if the ‘main activity’ of the group in which the Finco operates is not conducting a banking business. The FSA does not provide a precise quantitative definition of ‘main activity’. According to a separate policy rule of the Dutch Central Bank (De Nederlandse Bank, "DCB") however, a group is to be considered to conduct banking business if 80% or more of the balance sheet total of the group consists of financial institutions (financiële instellingen) that are attracting funds and on-lending them (outside the group).

There is one exception to this tightened rule and that is if the parent company, the Finco or the group company to which the Finco on-lends attracted funds has a banking license provided by the DCB, a financial supervisor of an EU member state or a supervisor from a foreign state (i.e. a non-EU member state) which has been appointed by our Minister as having sufficient financial supervision. At this point however, no foreign states have been appointed yet by our Minister as having sufficient financial supervision. In the literature it is expected that America, Japan, Australia, Switzerland and Canada will likely be appointed as states with sufficient supervision. This is because pursuant to the current section 3:2 paragraph 1 sub C, sub 2e FSA, banks with a license from supervisors in those five states are accepted for the purpose of providing a bank guarantee for the benefit of the bondholders. This also brings us to the next amendment.

3.2 Security for bondholders

In addition to the limitation for banking groups to make use of the exception rules, the requirements for providing security to the bondholders are also tightened.

Paragraph 5 of section 3:2 FSA provides a new obligation to Finco’s. Pursuant to this rule, Finco’s must be able to prove at all times that they comply with the requirements to fall within the scope of the exception rules. This effectively means that the Finco’s must prove that (i) the required guarantee is in place and (ii) if a guarantee or keep well commitment is provided by the parent, the parent is fully able to fulfill its guarantee obligations.

In the light hereof, the new paragraph 6 contains an obligation for Finco’s to inform DCB in case it is (reasonably) foreseeable that the Finco cannot longer comply with the requirements to fall within the scope of the exception rules. As a consequence, the Finco shall then become subject to a license requirement as of the date that DCB has established that the exception rules no longer apply to the Finco.

In the light of the above, a Finco that acts in breach of section 3:2 FSA is operating without a license or exception to the license requirement, and therefore runs the risk of receiving an administrative fine of up to EUR 4,000,000. This is because the Finco is attracting repayable funds from the public without a license (section 3:5 FSA) and/or is operating as a bank without a license (section 2:11 FSA).

The existing possibility to apply for an individual exemption (ontheffing) is now placed under paragraph 7 of section 3:2 FSA and remains materially unchanged.

4. Consequences for the business

A Finco that wishes to continue to fall within the scope of the exception rules should consider to have its group perform a check to verify that it does not qualify as a banking group (i.e. confirming that not 80% or more of the balance sheet total of the group is related to attracting funds and lending them on). This check should also be built in the compliance program of the group, so that if the organisation changes their main activities this will be noticed under the compliance program.

If the Finco makes use of (i) a guarantee by the parent company or (ii) a keep well agreement with the parent, the compliance program of the organization should also be supplemented with a monitor that verifies that all guarantee obligations of the parent in respect of the bondholders are continuously complied with.