The FSMA and the Protection of Financial Consumers
Opinion article by Luc Van Cauter (Advisor, FSMA)
In the wake of the financial crisis, a number of changes were made to the supervisory architecture of the financial sector in Belgium.
In line with the decisions taken in some of the other EU Member States, Belgium also moved from an integrated to a bipartite, or so-called "Twin Peaks", model. In this model, the microprudential and the macroprudential supervision of financial institutions are combined at the central bank, and the supervision of compliance by financial institutions with the rules of conduct is entrusted to a separate supervisor.
The Twin Peaks model was introduced in Belgium by the Law of 2 July 2010, which amended, among other legislation, the Law of 2 August 2002 on the supervision of the financial sector and on financial services (hereafter: Law of 2 August 2002).
The new Belgian supervisory architecture is based on the following division of tasks:
the National Bank of Belgium (hereafter: NBB) is entrusted with micro- and macroprudential supervision;
the "Financial Services and Markets Authority" (FSMA) (formerly the CBFA) exercises – over and above its traditional tasks in respect of financial markets, certain financial actors and the illicit offer of financial products and services – new competences as regards the supervision of compliance with the rules of conduct for financial institutions, the supervision of the distribution of financial products, and the financial education of the public.
The new division of powers between the NBB and the FSMA came into force on 1 April 2011.
II. The FSMA's powers with regard to protection of financial consumers
1. The statutory tasks of the FSMA
The "Twin Peaks" legislation assigns the following tasks to the FSMA:
- market surveillance;
- supervision of rules of conduct;
- product supervision;
- financial education of the public;
- supervision of pension funds;
- supervision of certain financial actors;
- perimeter supervision.
The objective of all these tasks, as determined in the Law of 2 August 2002, is the protection of financial consumers.
2. A brief explanation of the statutory tasks of the FSMA
a. Market surveillance
The market surveillance carried out by the FSMA concerns the smooth functioning, transparency and integrity of the financial markets. The FSMA supervises compliance with legislation governing the public offering of securities and takeover bids, the provision of information by listed companies and the functioning of the markets and market operators, including the prevention and combating of market abuse.
These competences fell within the traditional tasks of the former CBFA.
b. Supervision of compliance with rules of conduct
The supervision of compliance with the conduct of business rules is intended to ensure that consumers, clients and other stakeholders are treated honestly, fairly and professionally.
On the one hand, the FSMA supervises compliance with the rules of conduct by the financial institutions. On the other hand, it supervises compliance with the provisions regarding the organisational measures that these institutions must put in place in order to ensure a correct application of the rules of conduct (these involve requirements as regards the institution's expertise, business management and organization, the professional reliability of its directors and managers and the care with which it treats its clients).
The FSMA exercises the competences of the former CBFA as regards compliance with the rules of conduct by institutions that are henceforth under the prudential supervision of the NBB (this is thus an exclusive transversal competence).
The FSMA has to this end created a new, specialised department tasked with the supervision of compliance by banks with the MiFID rules of conduct. On-site inspections have started, using a newly developed methodology. The FSMA has also drawn up a Regulation governing the compliance officers of financial institutions. Furthermore, the legal basis has been laid down for an extension of the competences of the FSMA, in particular as regards the extension of the MiFID rules to other categories of financial institutions, and the supervision of pre-contractual information and advertising for financial products and services.
c. Product supervision
In the case of certain financial products (such as the public offering of investment instruments and the public offering of units of undertakings for collective investment) the FSMA carries out ex-ante supervision of documents (e.g. the prospectus) and advertising materials. Furthermore, the FSMA has broad and wide-ranging competences with regard to supervising the compliance of insurance policies with the applicable legislation.
The "Twin Peaks" legislation has also introduced new competencies in the area of product supervision.
Thus, the FSMA can draw up regulations banning or imposing certain restrictive conditions on the distribution of retail investment products (the so-called "traceability" of products). It can also draw up regulations aimed at promoting transparency regarding the prices and management fees for such products.
The FSMA has already taken a number of initiatives in anticipation of such regulations. Thus in June 2011, it launched a moratorium on the distribution of particularly complex structured products. Nearly every distributor of structured products has signed on to the moratorium, as a result of which the range of such products on offer has been reduced.
At the FSMA’s initiative, working groups have been set up with a view to finding ways to enhance the transparency of regulated savings accounts; one of the products of their work has been the designing of a new, standardised infosheet. A circular is also being drafted concerning advertisements for regulated savings accounts.
d. Financial education of the public
An important new task that the Belgian legislators have entrusted to the FSMA is to contribute to the financial education of consumers.
Financial education has a twofold aim. First, to give consumers better understanding of and insight into financial services and products. Second, to develop consumers' competencies and, where necessary, their behaviour, with a view to greater financial awareness.
The importance of financial training of the public cannot be overestimated. The financial crisis has clearly indicated how important it is for the consumer to be sufficiently financially literate.
e. Pension supervision
The FSMA is tasked with the supervision of institutions for occupational retirement provision and with supervising compliance with the social legislation governing supplementary pensions (including second-pillar insurance contracts). It has thus taken over the competencies of the former CBFA in this area.
f. Supervision of certain financial actors
The FSMA is competent to supervise the following actors:
undertakings for collective investment;
management companies of undertakings for collective investment;
portfolio management and investment advice companies;
currency exchange offices (bureaux de change);
insurance and reinsurance intermediaries;
intermediaries in banking and investment services.
These actors require authorization and are subject to operating conditions, all of which are supervised by the FSMA (as they were previously by the CBFA). What these categories have in common is that the emphasis of the supervision is mainly on compliance with the rules of conduct vis-à-vis their clients rather than on microprudential supervision, as is the case for credit institutions and insurance companies.
The FSMA advocates applying the supervision of rules of conduct, including the conditions for authorization and business operation, to certain actors in the financial sector that do not currently come under such supervision. These include, for instance, "financial planners" and "family offices". The FSMA has drawn up a draft law to this effect.
g. Perimeter supervision
Finally, the FSMA (like the CBFA before it) is responsible for contributing to ensuring compliance with the rules intended to protect financial consumers against the illegal offer of financial products and services.
Within the framework of this task, the FSMA regularly warns the public about persons or institutions that engage in financial activities requiring prior authorization or registration in Belgium without being authorized or registered to do so. Often these activities involve illegal offers of investment services, boiler room or cold calling activities.
3. Supervisory and sanctioning powers
It is important that the FSMA have the powers necessary to exercise its legal tasks effectively. In order to perform its tasks adequately, the FSMA can request any information necessary and carry out on-site inspections. It can set standards in the form of regulations. Innovative supervisory methods that allow it to determine how certain rules are applied in practice, such as mystery shopping, are in the pipeline.
Current legislation also provides for a variety of measures that the FSMA may take in the case of non-compliance with the legislation it is responsible for enforcing.
The Twin Peaks legislation designates the FSMA as the authority responsible for the supervision of the compliance with the rules of conduct by financial markets and financial institutions. The legislators have granted it wide-ranging and complementary powers in this area. The set of tasks entrusted to the FSMA may be considered both "ambitious" and "challenging".
Recent initiatives, such as the moratorium on the distribution of particularly complex structured financial products and MiFID inspections, indicate that the FSMA is taking a proactive approach to fulfilling its tasks. In its view, it is important that financial institutions put the customer's interests first, and that there be full transparency vis-à-vis the consumer as regards the risks and costs of the products being offered. The FSMA seeks to take a preventive approach in this matter, one that intervenes not only with regard to transparency or rules of conduct, but also in the production process itself.
 The full reference is the Law of 2 July 2010 amending the Law of 2 August 2002 on the supervision of the financial sector and on financial services and of the Law of 22 February 1998 establishing the organic status of the National Bank of Belgium, and containing various provisions (Belgian Official Gazette of 28 September 2010) (hereafter: Law of 2 July 2010).
 The moratorium is the first step in a process intended to culminate in the adoption of a Regulation on the distribution of complex financial products. See the FSMA press releases of 29 July 2011 and 12 August 2011 (www.fsma.be).