1. Introduction of DORA, which signals the importance of (IT) management
Regulators are expected to focus further on governance, procedures and control environments in their supervision of the financial sector. This is particularly relevant to the fintech space, as a response to (i) years of focus on growth; (ii) major governance failures in the sector over the past two years (eg the collapse of FTX and Wirecard); and (iii) the planned enactment of the Digital Operational Resilience Act (DORA), which is expected to come into force late in 2024. Note that DORA will not only be relevant for fintech companies, but for the financial sector in general.
In the area of governance, one of the main focus areas of Dutch regulators continues to be cyber security and good IT governance. DORA aims to reinforce this further by requiring both fintechs and regulated players to start compliance assessment and implementation early.
2. Turmoil in the markets for cryptoassets leads to increased regulatory scrutiny
Regulation on European markets for crypto-assets (MiCAR) will ensure a comprehensive and far-reaching regulatory framework for crypto-assets. MiCAR will regulate a wide range of digital assets and activities. It will introduce regimes for issuance, crypto asset services, market abuse and will complement and improve the anti-money laundering framework.
MiCAR is expected to enter into force in 2023, having been completed last year. Stablecoins will be subject to MiCAR first, after a 12-month transition period. Other provisions will come into full effect 18 months after MiCAR has entered into force.
3. Further tightening of the Dutch remuneration regulations which collide with the race for talent
Act on additional remuneration measures for financial enterprises (Wet nadere beloningsmaatregelen financier onderneningen, the Wnbf) entered into force on 1 January 2023. The Wnbf will tighten the possibility to make use of the “non-collective employment agreement exemption” from the Dutch 20% bonus cap, and limit the possibilities for Dutch fintechs to pay variable remuneration beyond 20% of the fixed remuneration to specific employees.
Until 1 January 2023, the Dutch reward regulations provided an exception to the Dutch 20% bonus cap. This exemption was available to employees in the Netherlands when their remuneration is not exclusively based on a collective agreement (den CLA exception). Variable remuneration exceeding 20% of the fixed remuneration was allowed, provided that (i) the average variable salary awarded to all employees in the Netherlands was not more than 20%, and (ii) the bonus awarded to the individual employee was not more than 100% of their fixed remuneration.
While it was explained that this exception was only for exceptional cases, various financial institutions used this exception to give higher bonuses. In a review of the Dutch remuneration regulations, the legislature concluded that the exception was applied too widely and not as originally intended by the legislature.
The Wnbf codified that the CLA exemption can only be used in exceptional cases, and can no longer be used for employees in internal control functions or employees directly involved in the provision of financial services to clients.
Tightening the CLA exemption will make it more difficult for Dutch fintech to attract and retain talent, and existing employment agreements will need to be reviewed or even amended.
According to the Wnbf, financial institutions must annually inform the competent regulator (DNB or AFM) about their use of the CLA exemption. The companies must justify the extraordinary circumstances that justify the use of the exemption, so that DNB and AFM can more effectively supervise the use of the CLA exemption.
4. Further investigation with respect to Buy Now, Pay Later solutions and potential for litigation
Buy-now-pay-later (BNPL) alternatives are increasingly common in the payment system. A wide range of fintech companies offer BNPL options, allowing consumers to buy a product now and defer payment in whole or in part. BNPL links payment services to lending activities, which are increasingly scrutinized by Dutch lawmakers and regulators.
In November, the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM) warned consumers about the risks of Buy Now Pay Later (BNPL) products. In another publication, the Dutch central bank (DNB) warned that BNPL product could make budget management more difficult, increasing the chance of people getting into financial difficulties.
We expect BNPL products to see significant withdrawal in 2023 and will be subject to further scrutiny by AFM and DNB.
In addition, we see the potential for legal proceedings against providers of BNPL options. Some of the major players in the area have already been involved in disputes over issues involving consumer protection. Klarna has been hit by several class action lawsuits after plaintiffs claimed it had misled users about the true risks associated with the service. We expect an increase in litigation or class actions against BNPL providers alleging that these providers failed to adequately or fully disclose adverse loan terms to customers and the risk of incurring significant fees if customers fall behind on payments.
5. Increased risk-based supervision and enforcement of integrity and AML risk with Fintech
Compliance of fintech with ethical business operations in general, and AML requirements specifically continues to be an important point of attention for the Dutch regulators.
Based on Wirecard and FTX, DNB and AFM may lose patience with fintechs that do not comply with the requirements. DNB has announced that it will start an investigation into the ethical business operations of certain fintechs that have grown significantly in recent years. Moreover, DNB has shown itself to be focused on this topic in 2022 by issuing a new round of fines to Dutch broker De Giro and online Bunq Bank for allegedly not meeting AML requirements. These developments make solid governance structures and regulatory compliance an early necessity, as well as a primary condition for long-term growth.
At the same time, technological and legal developments open up new (digital) methods to comply with the AML regulations for fintechs. In ground-breaking legal proceedings between Bunq Bank and DNB, the highest Dutch competent court ruled (among others) that AML regulations can be complied with using innovative, digital and risk-based methods. Just before this ruling was handed down, DNB published a report stating that it will take a more risk-based approach in its supervision of AML compliance
6. ESG in fintech
The growing trend of increased regulatory scrutiny of environmental and climate change, combined with increased demand for sustainable production methods, products and new business models, led to an increased focus from the technology world on these ESG issues. We expect to see significant growth in Greentech and Cleantech, as well as ESG elements in the fintech area in 2023.
7. Headwinds in the macro market affect the sector
Winners are beginning to emerge from the ranks of fintech start-ups as these fintechs, and the broader markets, reach maturity and mainstream adoption. The maturing market is likely to attract additional funding to maturing startups, may trigger the decline of fintech laggards, and further promote acquisitions within and outside the industry.
The current trend of market consolidation among start-ups and existing players is likely to continue as well, in light of ever-increasing cost cutting and the drive for profitability and macroeconomic headwinds.
In light of lower valuations and a challenging loan financing market, we can see more interest and activity in fintech from institutional investors and strategic buyers.
