On 1 January 2009 the rules on fees (including remuneration or compensation in any form) for the provision of financial services and on credit advertising were amended. On that date, most of the provisions of the "Decree amending the Financial Institutions Business Conduct Supervision Decree with a view to the harmonisation of the rules on fees applicable to offerors and intermediaries, and the Decree on Fines under the Financial Supervision Act" (the "Decree") came into effect.
The Decree imposes new, stricter rules on the fees for the provision of financial services. The fee rules that already applied to the provision of investment services now also apply to the provision of services with respect to financial products other than financial instruments. Moreover, financial service providers are required to furnish additional information to their clients regarding the fees they receive or pay.
The Decree also introduces a number of new rules on the content of credit advertisements, requiring that they contain extra warning statements. In addition, the advertisement may not claim that credit will be granted irrespective of the information obtained from the Credit Registration Office on the client's credit rating or where the granting of credit would otherwise be contrary to the provisions of the applicable code of conduct.
This newsletter contains an overview of the most important changes regarding fees and credit advertising. It also summarises the fee rules that were in effect before 1 January 2009 and will continue to apply alongside the new rules.
Scope of application of new fees and credit advertising rules
The rules for financial service providers, including the new rules on fees and credit advertising, contained in the Financial Services Act (Wet op het financieel toezicht, the "Wft") and the Financial Institutions Business Conduct Supervision Decree (Besluit gedragstoezicht financiele ondernemingen Wft, the "Bgfo") in principle apply only where financial services are provided to consumers. An exception is made for insurance products: where the financial services relate to insurance products, the rules for financial service providers also apply where the services are provided to legal entities and individuals acting in the course of a business or profession.
Pre-existing fee rules
Below is a short overview of the fee rules that applied before 1 January 2009 and will continue to do so alongside the new rules:
- General obligation to furnish information
Advisors on and intermediaries in financial products, such as consumer credit and insurance products, must inform their clients of the manner in which they are remunerated.
- Prohibited fees for the granting of credit
An intermediary in consumer credit may only receive fees from or pay fees to the offeror of the credit and not from or to any other party, such as the client. This rule does not apply for certain forms of mortgage loans and loans collateralised by securities. There are also rules on the conditions under which an intermediary is entitled to receive fees from the offeror.
- Balance and repayment rules
o Balance rule
Under what is known as the balance rule, no more than 50% of the total fees paid by the offeror to the intermediary for a complex product, such as a mortgage combined with an investment-linked insurance, may be paid upfront upon the conclusion of the agreement. The rest of the fees must be spread out proportionally over the remaining term of the agreement or, if the total term of the agreement is longer than ten years, over at least ten years.
The balance rule came into effect on 1 January 2007. From that date until 1 January 2011, a transitional rule applies, pursuant to which:
o For agreements concluded before 1 January 2010 a maximum of 70% of the total fees may be paid upfron
o For agreements concluded from 1 January 2010 up to and including 31 December 2010, a maximum of 60% of the total fees may be paid upfront.
For more information about the transitional rule, see the section below entitled "Staggered effective dates and AFM enforcement policy".
0 Repayment rule
The upfront fees for a complex product must be repaid pro rata if the relevant agreement is terminated prematurely within the first five years after the conclusion of the agreement, unless the termination results from the sale of the real estate to which the complex product relates or from the death of an insurance client.
Since the implementation on 1 November 2007 of the Markets in Financial Instruments Directive ("MiFID"), investment services (such as asset management and investment advice) have been subject to the inducement norm.
The basic premise of the inducement norm is that fees are not permitted. There are three exceptions to this prohibition, namely:
- Where the fee enables or is necessary for the provision of the relevant service;
- Where the fee is paid by or to the client; or
- Where the fee is paid by or to a third party, and the following three conditions are met:
- The existence, nature and amount of the fee or, where the amount cannot be ascertained, the method of calculating that amount, is disclosed to the client in a manner that is comprehensive and understandable, prior to the provision of the relevant service;
- The payment of the fee enhances the quality of the relevant service to the client; and
- The payment of the fee does not impair compliance with the investment firm's duty to act in the client's best interests.
Changes to fee rules
As indicated above, the Decree imposes new, stricter rules regarding the fees for the provision of financial services. The changes that are most important in practice will be discussed below.
Pursuant to the Decree, the above-described inducement norm for the provision of investment services also applies, as from 1 January 2009, for the provision of financial services with respect to complex products and mortgage loans.
This means that it is prohibited for an offeror, intermediary or advisor to pay or receive a fee for acting as an intermediary or advisor in relation to a complex product or mortgage loan, unless:
- The fee enables or is necessary for the provision of the relevant service;
- The fee is paid by or to the client; or
- The fee is paid by or to a third party, and the following three conditions are met: The existence, nature and amount of the fee or, where the amount cannot be ascertained, the method of calculating that amount, is disclosed by the intermediary or advisor to the client in a manner that is comprehensive and understandable, prior to the provision of the relevant service;
- The payment of the fee enhances the quality of the relevant service to the client; and
- The payment of the fee does not impair compliance with the duty of the intermediary or advisor to act in the client's best interests.
According to the ministerial memorandum explaining the Decree, bonus schemes and turnover-based fees do not comply with the inducement norm and are no longer permitted.
Nominal fee transparency
An intermediary in complex products or mortgage loans must, prior to the conclusion of an agreement, inform the client of the fees to be paid by the offeror of the product or loan. The intermediary may not in this respect refer to a percentage, but must state the actual amount to be paid by the offeror (nominal transparency). The amount must include all fees to be paid by the offeror, directly or via an intermediary, even if part of them will not be paid to the intermediary in question, but for instance to a buyers' cooperative.
An advisor on or intermediary in complex products or mortgage loans must, prior to providing its financial services and at the earliest possible stage, furnish the client with a document containing information about the nature and scope of the financial services and the fees it will receive in that regard. This obligation does not apply to an advisor that is also the offeror of the complex product or mortgage loan.
An offeror of complex products or mortgage loans that does not use the services of an intermediary but offers such products or loans directly (direct writers) must, prior to the conclusion of an agreement, furnish the client with a cost statement. This document must explicitly state that the offeror incurs costs for distributing (including advising on) the complex product or mortgage loan and that these costs are included in the price or may be reflected in the applicable interest rate.
The balance rule now also applies with respect to mortgage loans combined with an investment account.
The repayment rule now applies to all mortgage loans (and thus no longer only to complex products).
Savings products offered by banks
As from 1 January 2009, savings products offered by banks are classified as complex products. This means that, with respect to those products, a financial information leaflet must be prepared and all the fee rules must be complied with.
Fee rules in chart form
The following is a chart outlining the rules regarding fees (note that different effective dates sometimes apply).
Changes to credit advertising rules
Mandatory warning statements
Advertisements for the granting of credit, with the exception of advertisements for mortgage loans for the purchase of a home by the borrower, must warn about the consequences of the credit. The AFM is now developing standard texts and symbols, which it will make available in early 2009 via its website.
Prohibited advertising claims
Advertisements may not claim that credit will be granted:
- Irrespective of the information obtained from the Credit Registration Office on the client's credit rating; or
- Where the granting of credit would otherwise be contrary to the provisions of the applicable code of conduct.
Staggered effective dates and AFM enforcement policy
Staggered effective dates
The point of departure is that the new rules regarding fees and credit advertisements apply as from 1 January 2009. The new rules regarding nominal fee transparency, the obligation to furnish a services document and the obligation to furnish a cost statement apply only with respect to agreements concluded after 1 January 2009.
There are a number of exceptions to the above point of departure:
- The obligation to include the extra warning statements in credit advertisements will take effect on 1 April 2009;
- The obligation to furnish a services document will take effect on 1 July 2009.
Transitional rule for balance rule
The following transitional periods apply with respect to the balance rule:
- As stated above, the balance rule entails that for agreements concluded as from 1 January 2011, no more than 50% of the total fees may be paid by the offeror to the intermediary upfront. The rest of the fees must be spread out proportionally over the remaining term of the agreement. Pursuant to a transitional rule, for agreements concluded from 1 January 2009 up to and including 31 December 2009, a maximum of 70% of the total fees may be paid upfront, and for agreements concluded from 1 January 2010 up to and including 31 December 2010 a maximum of 60%.
- Another element of the balance rule is that the part of the total fees that is not paid upfront must be spread out proportionally over the remaining term of the agreement. This rule applies only for agreements concluded before 1 January 2010.
Enforcement by AFM
- Until 1 April 2009 the AFM will be lenient in enforcing the rules regarding (i) nominal fee transparency and (ii) the obligation under the inducement norm to disclose the fees received or paid. A condition for this leniency is that the relevant market parties can show that they have done their utmost to comply with the relevant fee rules as soon as possible after 1 January 2009 but in any event no later than 1 April 2009;
- With respect to the enforcement of the other new fee rules (i.e. most of the inducement norm provisions, the obligation to provide a cost statement or the services document and the amendments to the balance and repayment rules), the AFM will not show leniency in supervising compliance;
- The AFM will strictly enforce the prohibition (pursuant to the inducement norm) against turnover-based fees as from 1 January 2009 but will in principle refrain enforcing the other elements of the inducement norm until after it has provided further guidance in this regard (see "Future developments" below).
Additional amendments to rules
The Ministry of Finance has announced that in early 2009 it will commence consultation procedures on additional amendments to the fee rules. More specifically, the amendments will relate to (i) the nominal transparency of offerors' costs and (ii) a total ban on bonuses.
Further guidance by AFM
The AFM has announced that it will, in close consultation with the relevant trade associations, provide further guidance on the inducement norm. However, it has not yet indicated when it will do so.
In light of the new fee and credit advertising rules, we would advise you to take the following action:
- Verify whether and, if so, when you must comply with the new fee rules;
- Verify whether the fees that you pay or receive comply with the new fee rules;
- Verify whether the information you provide regarding fees complies with the nominal fee transparency rules;
- If you advise on or are an intermediary in complex products or mortgage loans, prepare and furnish a services document;
- If you are a offeror and sell your complex products or mortgage loans directly to clients, prepare and furnish a cost statement; and
- Review your credit advertisements and, where necessary, adapt them to the new advertising rules.