Introduction
BeFRA case
BNA case
Comment
The liability of financial regulators has been much discussed in recent years in light of the economic and financial crisis, which saw multiple financial institutions fail and governments forced to step in to save such institutions from bankruptcy. In the Netherlands, in contrast to the majority of EU member states, to date no specific statutory provision limits the liability of financial regulators. The Dutch courts have ruled on the liability of financial regulators pursuant to the general tort principles of the Civil Code. According to Dutch case law, the courts have exercised restraint when holding financial regulators liable for inadequate supervision. The Supreme Court recently confirmed this again in the BeFRA case.(1)
The Stichting BeFRA foundation was established in 1998. As the managing partner, BeFRA entered into limited partnerships with private investors. BeFRA was registered with the Dutch Authority for the Financial Markets (AFM) as a client remisier. A 'client remisier' is an intermediary which brings together potential clients and investment companies; pursuant to the then-applicable rules, such remisiers were exempt from the licence requirement for securities brokers and asset managers, provided that their activities were restricted to those of client remisiers. BeFRA executed securities transactions for the limited partnerships through bank accounts. In 2000 BeFRA was declared bankrupt and it came to light that funds invested by limited partners were largely diverted through BeFRA to the personal accounts of BeFRA's chairman. In bankruptcy, the limited partners received partial repayments of the funds from the trustee and subsequently initiated legal proceedings against the AFM. According to the limited partners, the AFM was liable as it failed to take action on receiving warnings that BeFRA was acting as a securities broker and asset manager without the required licence. Action by the AFM could have mitigated or prevented the losses incurred by the limited partners.
At first instance, the district court ruled that the AFM was liable because of inadequate supervision. According to the court, the standard for adequate supervision was "a reasonably acting regulator". The court found that the AFM had failed to react adequately to BeFRA's notification that it had opened an account as managing partner of various limited investment partnerships, which should have been a signal that BeFRA was acting as an asset manager without the appropriate licence. In addition, the court held that the AFM should have take action as there were clear signals of (impending) breach of securities rules.
The Court of Appeal overturned the lower court's ruling. The appeal court first held that BeFRA did not trigger a licence requirement for securities brokers and/or asset managers under the then-applicable Securities Transactions Supervision Act 1995. Subsequently, the court held that the AFM was not liable for inadequate supervision. It found that the circumstance that investors incurred losses due to a violation of the securities law by a financial services provider did not lead to automatic liability of the AFM. The standard for liability used on appeal was different from that used by the district court. The appeal court applied the standard used by the Supreme Court in the Vie d'Or case(2) – that is, "an adequate and prudent regulator". According to the appeal court, the AFM was liable, due to carelessness, for losses incurred by investors resulting from a violation of securities law only if, in the circumstances, the AFM could "not reasonably have decided to refrain from the use of its powers". The appeal court provided some guidelines in relation to such circumstances, including:
- the extent to which signals received by the AFM indicated that applicable rules of conduct were being violated;
- the scale of imminent damage; and
- the nature of the powers at the AFM's disposal.
In its long-anticipated ruling of April 8 2011, the Supreme Court failed to provide further insight on the standard for liability of financial regulators as some had hoped it would. Rather, the court reviewed the issue of the licence requirement for BeFRA as a securities broker and/or asset manager and held that BeFRA did not trigger such licence requirement. Therefore, the AFM was not liable for inadequate supervision and the Supreme Court upheld the Court of Appeal's decision.
The Supreme Court recently provided some additional insight on the liability standard in a case concerning Bank van de Nederlandse Antillen (BNA), the financial regulator of the Dutch Antilles.(3) The trustee of Rasmal Finance BV initiated proceedings against BNA claiming that it had permitted Rasmal to transfer funds to its subsidiary in Anguilla. As a result, following Rasmal's bankruptcy in the Antilles and Anguilla, depositaries in the Dutch Antilles lost their deposits. According to the standard used by the Supreme Court, BNA was liable for losses incurred by depositaries only if, in the circumstances, BNA could not "in view of its options and powers" have reasonably decided to refrain from the use of its powers. In contrast to the Vie d'Or case, the Supreme Court added the wording "in view of its options and powers". The result is that courts must review regulators' conduct more cautiously if regulators have been given limited or no supervisory powers, and they have the freedom to choose alternative options. As BNA had no supervisory powers to prohibit the transfer of the deposits by Rasmal, but did have substantial freedom to make use of the few alternative options available, BNA's conduct should be reviewed by the courts more cautiously. The Supreme Court did not hold BNA liable for inadequate supervision.
The minister of finance recently announced that a statutory provision limiting the liability of financial regulators to wilful misconduct or gross negligence would be added to the Financial Markets Supervision Act. This liability standard would be in line with the practice in the majority of EU member states. Consequently, financial regulators would be able to perform their supervisory duties without the fear of being held liable. A draft bill is being prepared and is expected to be submitted to Parliament in September 2011.
For further information on this topic please contact Simone Peek or Stana Maric at Clifford Chance LLP by telephone (+31 20 711 9000), fax (+31 20 711 9999) or email ([email protected] or [email protected]).
Endnotes